What is an arbitrage?

In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices at which the unit is traded.

When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs. For example, an arbitrage opportunity is present when there is the possibility to instantaneously buy something for a low price and sell it for a higher price.

The Crypto currency arbitrages

Following from the Wikipedia definition, Crypto currency arbitrage can be defined as the practice of taking advantage of the price difference of Bitcoin (or any other crypto asset) that occurs between two crypto exchanges.

Why Does a Crypto currency Arbitrage Occur?

When reviewing the Bitcoin price, it is important to remember that there is no standard or global Bitcoin price. Bitcoin is not pegged in any way to the USD or to any other currency, country or any exchange. The two primary causes of price differences on exchanges are:

 Supply and Demand

Bitcoin exchanges are places where people who have Bitcoin (supply) can sell it to those who want it (demand). This also means that if you have two exchanges —Exchange A and Exchange B— and both support USD and BTC there is a high possibility of an arbitrage opportunity occurring. The price of Bitcoin will not always be the same on both. The price will simply be whatever supply and demand dictates.

If an exchange has more people selling than they are buying, the price is likely to drop, as supply outweighs demand.

The opposite applies when more people are buying on that exchange, should demand outweigh supply, the price will go up.
Luno is an exchange which has until recently operated in lower volume markets outside of the US dollar-based exchanges.

These lower volume markets have displayed supply and demand behaviour that often does not correlate with the bigger exchanges, thus creating numerous arbitrage opportunities.

Small Exchange Lag

Smaller exchanges follow the price of larger ones, with a small lag. That small lag helps make arbitrage possible. These lags happen in many different markets, and in general it is the arbitrageurs whom spot these price differences and create equilibrium by exploiting and thus closing the gaps.

Next

Next we are going to explore 2 different arbitrage methodologies. The first, which we refer to as “the loop’ is a slow, clumsy and expensive arbitrage process, but demonstrates the fundamentals of an arbitrage in crypto-currencies. Once that concept is displayed, The Arbfin methodology, known as the Oscillator will be unpacked – to reveal a unique and novel method of efficiently extracting a profit from small price differences that occur between Crypto-currencies