What is Arbitrage?
Crypto Glossary Definition
A price difference between the same asset across different markets. When this occurs, traders can buy on the exchange with the lower price and sell on the higher (turning a profit). This often happens due to low liquidity in an inefficient market. Over time, as arbitrage traders capitalize on the opportunity, the price gap will becomes smaller and eventually converge back to an unprofitable level.
Why Arbitrage Matters
Because the same coin can trade at slightly different prices across exchanges (or even across countries — see the "Kimchi Premium"), arbitrage traders profit from buying low on one venue and selling high on another. The gap tends to close quickly once bots and traders spot it, which is why manual crypto arbitrage is far harder today than it was in the market's early years.
Arbitrage in Practice
A trader monitoring multiple exchanges notices that a mid-cap token is trading noticeably higher on a South Korean exchange than on a U.S.-based platform, a gap sometimes nicknamed the Kimchi Premium when it involves Korean markets specifically. Seeing the opportunity, they buy the token on the cheaper U.S. exchange, transfer it to the Korean platform, and sell it there for a profit before the price gap closes, effectively capturing the difference created by the two markets not being perfectly connected. The trade works, but only barely, since transfer times, withdrawal fees, and the token's price shifting slightly during the transfer all eat into the margin. When they try the same strategy again the following week, they find the gap has narrowed to almost nothing, because automated arbitrage bots, watching the same price feeds continuously and executing far faster than any human, have already closed most of the inefficiency. This mirrors a broader pattern across crypto markets: price discrepancies between exchanges tend to appear during periods of low liquidity or sudden volatility, but competition among arbitrage traders, especially algorithmic ones, usually pulls prices back into alignment within minutes, which is why manual arbitrage that was profitable in crypto's earlier years has become considerably harder to execute today.
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