Due to differences in the exchange rate between the US dollar and the Japanese yen, the share price varies according to the location of the market in which it is traded.
If you are still not sure about how arbitrage works, let's take an example from the stock market.
At this point, if it is convenient to buy shares in the US market and resell them in the Japanese market (or vice versa) at virtually the same time, this is true arbitrage. In fact, the simultaneous action of several arbitrage traders will soon cancel out the price differences, restoring equilibrium in the two markets.
The same principle can be applied to cryptocurrencies: even better, crypto coins do not have an official price decided by the market, so it is pretty common to find different platforms where the same coin is sold at different prices.
Exploiting the difference in price, you can easily buy a coin from an online exchange website and immediately sell it on another exchange website, where it is listed at an higher price, and gain money from the price difference.
Cryptocoins’ prices are very volatile, so you need to be really fast, be careful to not let too much time pass between buying and selling: the price of the currency you bought could drop within minutes, and you can lose all your profit!
Types of arbitrage
There are basically two types of arbitrage: pure arbitrage and risk arbitrage. Let's try to understand the differences. The first is the basic form of arbitrage: i.e. taking advantage of time differences in the prices of two instruments traded in different markets. In the age of networked computers and online trading, such differences are now increasingly rare, making pure arbitrage trading difficult.
Risk arbitrage, which consists of acting on assets whose price changes rapidly, prevails: for example, when a company is acquired by a multinational and is no longer listed not only on the local market but also abroad. Suppose that at the opening of the Milan market, prices of the Italian-based company XY are at high price because a major acquisition was announced at the opening of the market. The New York Stock Exchange is still closed because it is night in the US city, so XY prices in New York are not affected. At the opening of the New York market, we know for certain that XY prices are destined to rise rapidly if this has been the trend in Milan. Therefore, by skilfully and quickly taking advantage of the fact that it will take time to rise, I can think of buying in New York and reselling temporarily in Milan, in order to make a profit. While doing this kind of arbitrage manually is extremely risky and requires a lot of knowledge, there are online software and trading platforms that can help you monitor the price situation, and also allow you to buy and sell with ease, reducing the overall risk of losing your money and allowing you to gain more profit!
