In this article, we explain what Exchange Arbitrage is and how it works.

What is Exchange Arbitrage?#

Exchange Arbitrage profits from price differences across exchanges. It is possible due to market inefficiencies and disappears in perfectly efficient markets. Take advantage of the supply and demand differences in prices between exchanges without needing to withdraw funds from the exchange.

The Exchange Arbitrage bot on Cryptohopper does not send funds among different exchanges (as you might expect from Exchange Arbitrage). So we don't need permission for "withdrawal rights" through the API.

How does Exchange Arbitrage work?#

To do Exchange Arbitrage, you need to own all the currencies you use for the trade. For example, your quote currency is USD. You think ADA, ATOM, and EOS can be used for Exchange Arbitrage on multiple exchanges. You need all these currencies on all the exchanges.

See how Exchange Arbitrage works in practice: You see an Exchange Arbitrage opportunity between USD (your quote currency) and EOS (the currency offering the Exchange Arbitrage opportunity):

1. You own USD and EOS on exchanges A and B.
2. On exchange A, the price of EOS is 3.10. On exchange B it is 3.02. Since there’s a price difference there’s an Exchange Arbitrage opportunity.
3. A manual Exchange Arbitrage trade will consist of buying EOS on exchange B and selling it for a higher price on exchange A back to USD. Your portfolio would result in a USD gain.

An automated Cryptohopper Exchange Arbitrage trade would do it differently but results in the same USD gain. Let's recall that you own USD and EOS on both exchanges. As we know, the goal is to keep the same amount of EOS while increasing your total USD amount.

See how Exchange Arbitrage works in practice on Cryptohopper:

1. You own USD and EOS on exchanges A and B.
2. On exchange A, the price of EOS is 3.10. On exchange B it is 3.02. Since there’s a price difference there’s an Exchange Arbitrage opportunity.
3. An automated Exchange Arbitrage with Cryptohopper will consist of buying EOS on exchange B. At the same time sell the same amount on exchange A.