Arbitrage cryptocurrency trading is an important element in securing the function of decentralized exchanges (DEXes) that use automated market making (AMM) to determine the price of crypto assets. Without crypto arbitrage traders, replenishing liquidity pools and equalizing their balance, which changes after every transaction, would be rather problematic.
Simply put, arbitrage traders buy cryptocurrency where it is cheaper and sell it where it is more expensive. The traders monitor the price of cryptocurrency trade pairs on various platforms (for example, on exchanges) and buy or sell an asset when they find that its price differs across platforms. To perform this transaction, as a rule, they don’t even transfer their asset from one platform to another (there is simply no time for that), but keep funds on all platforms.
Sometimes this chain of exchange operations can be quite long if an arbitrage trader finds it profitable. For example, a certain chain of exchange operations, which many arbitrage traders follow, is initiated with every fluctuation in the exchange rate of currency pairs (BTC/ETH, ETH/TON, and TON/BTC). By sequentially trading BTC for ETH, ETH for TON, and TON for BTC, traders end up with more bitcoins than they had to start.
Arbitrage traders do not need to analyze market dynamics, develop long-term strategies, or attempt to predict bitcoin prices. It is enough to find differences in asset prices on various platforms and complete the transaction quickly. Therefore, cryptocurrency arbitrage is considered a low-risk strategy, but isn’t exactly easy to implement – this method requires large stockpiles of assets on different platforms. Frankly, the difference in asset prices is usually insignificant, and the arbitrage trader conducts a massive number of trading operations every day to turn a tangible profit.
Moreover, for successful arbitrage you need the technical means (bots, for example) to monitor prices and the course of trade – there are many “hunting” for the arbitrage situation and it often comes down to milliseconds.