Arbitrage trading is a relatively low-risk trading strategy that takes advantage of price differences across markets. Most of the time, this involves buying and selling the same asset (like Bitcoin) on different exchanges. Since the price of Bitcoin should, in theory, be equal on Binance and on another exchange, any difference between the two is likely an arbitrage opportunity.
Arbitrage describes the act of buying a security in one market and simultaneously selling it in another market at a higher price, thereby enabling investors to profit from the temporary difference in cost per share. In the stock market, traders exploit arbitrage opportunities by purchasing a stock on a foreign exchange where the equity's share price has not yet adjusted for the exchange rate, which is in a constant state of flux. The price of the stock on the foreign exchange is therefore undervalued compared to the price on the local exchange, positioning the trader to harvest gains from this differential. Although this may seem like a complicated transaction to the untrained eye, arbitrage trades are actually quite straightforward and are thus considered low-risk.
This is a very common strategy in the trading world, but it’s mostly been a tool of large financial institutions. With the democratization of financial markets thanks to cryptocurrencies, there might be an opportunity for cryptocurrency traders to take advantage of it, too.