What is arbitrage? Let’s first understand the basic principle! (Series 1)
“What is arbitrage?”
We will explain the general meaning.
Recently, arbitrage has been attracting attention in Bitcoin trading as well.
Let us also consider the reasons for this.
“Trading by exploiting market distortions”
Arbitrage is translated as “arbitrage trading,”
and its meaning is generally “taking advantage of temporary price differences to earn a spread.”
Market distortions can arise due to various factors.
Arbitrage, or “spread trading,” refers to the act of using such situations to buy and sell with low risk to earn profit.
As a method, when a temporary price difference occurs for some product, you sell the more expensive and buy the cheaper one.
Because this price difference is due to market distortions, theoretically it will eventually be resolved.
By monitoring market trends and timing the moment when the price gap between the two narrows, you then buy the higher-priced one and sell the cheaper one.
In doing so, you can profit from the price difference that arose during this interval.
This has been a trading method used across various markets—primarily in cash and futures in the stock market, but also in currencies, interest rates, commodities, and other markets.
Arbitrage with Bitcoin
Recently, more people have begun to think that this arbitrage technique can be applied to Bitcoin trading.
There are many Bitcoin exchanges around the world. Since trading occurs on each exchange, Bitcoin prices differ to some extent from exchange to exchange.
When exchanging Japanese yen into foreign currencies like dollars or euros, the rate can vary noticeably depending on where you exchange.
Bitcoin trading can be imagined similarly.
Currency exchange can be expensive at airports, while banks are relatively fair, or vice versa. Even for the same currency, buying and selling prices have different rates.
Moreover, fees vary considerably among exchange services.
Similarly, Bitcoin prices are not uniform across all platforms. It may be more accurate to say there are “differences” or “discrepancies.”
By arbitrage using price differences that arise between exchanges, attention is focused on the possibility of earning profits.
[Example]
A Exchange 1 BTC = 501,000 JPY
B Exchange 1 BTC = 504,000 JPY
In the simplest terms, in the above example there is a 3,000 yen price gap between A and B exchanges, so by buying on one and selling on the other you can earn the difference as profit.
Because the market is not yet mature
In theory, arbitrage is a investment method anyone can perform, but in actual markets significant price differences that guarantee profit do not arise very often.
Typically, you must commit a fairly large investment to gain corresponding profit from a very small price difference, so it is not suitable for ordinary investors.
However, the reason Bitcoin is attracting attention lies in this aspect.
Many people feel that cryptocurrency markets are highly volatile.
There are various reasons, but one is that because it is new, the actions of market participants tend to vary a lot.
In other words, the market has not matured yet.
For that reason, Bitcoin markets tend to produce relatively large discrepancies or price differences.
When price differences are large, even ordinary investors with smaller capital can profit, creating opportunities.
Moreover, if more people conduct arbitrage with larger amounts of money, price differences will shrink more quickly.
In other words, arbitrage also serves to guide market prices to proper levels.
Conversely, if more players engage in arbitrage, expect price differences to be resolved more quickly.
Additionally, for altcoins (cryptocurrencies other than Bitcoin), although there is potential,
in Japan there are still only a few exchanges handling them, making arbitrage more difficult.
（To be continued）
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