Crypto arbitrage software allow a trader to gain from cryptocurrency price differences existing in the cryptomarket, capitalising on changes in market price between the same pairs listed on different exchanges.
In order to execute an exchange arbitrage, a trader needs to own the cryptocurrencies he would like to arbitrage on. For example, let’s suppose he/she owns two cryptocurrencies, BTC and ETH, with BTC as the base coin and ETH likely to offer arbitrage opportunities on two (or more) exchanges.
Let’s suppose also that an arbitrage opportunity arises between BTC and ETH. As we said, a trader needs to own BTC and ETH on two exchanges, say X and Y. Suppose that the price of ETH is 220 on exchange X and 222 on exchange Y. The arbitrage opportunity arises because ETH is more expensive on exchange Y.
Arbitrage theory teaches us that a trader should buy ETH on Y and sell it for a higher price on X, back to BTC. Then, the arbitrage would result in a BTC gain. An automated arbitrage trade would do it differently but will end in the same BTC gain. The trader’s goal is to keep the same amount of ETH while increasing total BTC amount.
In order to do it, the trader would sell 1,000 (expensive) ETH on X for BTC. At the same time, he would buy 1,000 ETH (cheap) on Y to maintain the same amount of BTC he owned before the arbitrage.