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Arbitrage 101
Arbitrage is when the price differs between two different exchanges. Profit is generated by buying low on one exchange and selling high on another! Arbitrage is typically made possible by a difference in trading volumes between two separate markets. The reason behind this is simple: in a market with high trading volumes where thereโ€™s reasonable liquidity of a particular coin, prices are generally cheaper. Meanwhile, in a market where thereโ€™s limited supply of a particular coin, it will be more expensive. By purchasing from the former and instantaneously selling on the latter, traders can theoretically profit from the difference.
However, arbitrage opportunities also exist in the opposite direction, where you would buy on a smaller exchange and sell on a larger exchange. The recent surge in the popularity of cryptocurrency has led to a dramatic increase in trading volumes on many exchanges around the world. Those exchanges are not linked, and a low trading volume on some exchanges can mean that the price listed doesnโ€™t adjust to the exchange average immediately. As a result, this has seen the creation of price differences arbitragers could potentially exploit.
The most famous example of crypto exchange pricing differences was a phenomenon known as the โ€œkimchi premiumโ€ which, in January 2018, saw the price of Bitcoin (BTC) in South Korea rise to more than 50% higher than global prices.
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