Cryptocurrency arbitrage refers to buying cryptocoins on an exchange where the price is lower and simultaneously selling the altcoin at an exchange where the price is relatively higher, ultimately profiting from a temporary difference in prices. The prices of cryptocurrency may vary from one exchange to another, because the markets are not directly linked. The difference in supply and demand across exchanges may result in significant price fluctuation. Often it may take time for prices to adjust to global average.
If all markets were totally efficient, there would almost never be any visible arbitrage opportunities, however occasional markets still continue to remain imperfect. It is important to understand that when markets have some discrepancy in pricing between two pairs, there isn’t always a guaranteed arbitrage opportunity. Often a transaction costs may take away the benefits of the possible arbitrage opportunity.
While arbitrage may present a lucrative window of opportunity to generate passive income, it is very important to understand the potential market risks and the speculative nature of the business. The transaction fees may vary from one exchange to another, therefore it is important to familiarize yourself with this subject prior to making any trades.