# Understanding Crypto Arbitrage

By [Vaibhav Basantani](https://paragraph.com/@basantani) · 2022-02-05

---

Arbitrage basically means buying from a market where the price of a particular asset is low and then selling it in a market where the price of the same asset is high.

This usually happens in minutes and unlike day trading or swing trading, one doesn’t wait for particular price action.

It happens due to the concept of liquidity variance. There’s some variance in the prices of the assets on different exchanges and using that to one’s advantage is what arbitrage is.

But how does it happen?

A bunch of people use exchange A and another bunch of people use exchange B for buying and selling their assets. The trade demand & supply is different on both the exchanges, the bid-ask everywhere is slightly different and hence the prices differ.

Simple arbitrage trading works with small amounts only and it can’t continue to work infinite times. This is because :

You are buying from market A and selling to market B. This way, you create more demand in market A because of constant buying from there (creating scarcity) and more supply in market B because you are selling all of it there (creating a surplus). A point will come when the prices of the asset on both markets will almost be the same and the profit earned will be negligible. Also, not to forget the transaction fees which vary on each exchange.

A lot of potential arbitrage opportunities exist on smaller exchanges with relatively new, less developed tokens.

Now let’s move to a little advanced but exciting concept of triangular arbitrage. As the name suggests you might get the hint that there are 3 different currencies involved here. For this example, let’s take USD, Uniswap & Ethereum. It goes something like this :

*   Buy Uniswap using USD
    
*   Trade Uniswap with Ethereum
    
*   Sell Ethereum
    

Seems simple but how do you actually make money?

You make money from the UNI/ETH exchange. This specific exchange tracks the price of these assets in relation to each other (Uni & Eth). There are three pairs of currencies here:

*   USD/UNI
    
*   UNI/ETH
    
*   ETH/USD
    

Now, talking about some numbers which were picked while I was making this post,

USD/UNI rate: $16.88/uni

UNI/ETH rate: 237 uni/eth

ETH/USD rate: $4045/eth

Let’s say you have $1000 at the start and you buy Uniswap tokens.

*   You get 59.24 UNI
    
*   When you trade these 59.24 UNI with ETH, you get 0.25 ETH and
    
*   When you trade this ETH with the USD, you get $1011.
    

So you made a profit of $11 which seems pretty less after so much hassle but prices change every second and it also depends on what exchange you use.

Now practically doing this all day long isn’t very realistic and hence crypto trading bots exist which do this task automatically.

Some important aspects to consider here are:

*   Your timings of buying and selling
    
*   Which exchange do you choose
    
*   Taking the exchange fees into account
    

as being careless might make you lose money rather than making anything especially because of the fees.

That’s the end of this article, hope it was helpful in making you understand the concept. This thread by no means is giving any financial advice and it’s just for learning purposes only. As always, DYOR and WAGMI.

---

*Originally published on [Vaibhav Basantani](https://paragraph.com/@basantani/understanding-crypto-arbitrage)*