What is crypto arbitrage?

Crypto arbitrage is a trading strategy that tries to profit when the same coin sells for different prices in different places. A trader buys where the price is lower and sells where it is higher, ideally at almost the same moment. Kraken describes it as exploiting temporary inefficiencies in crypto prices across markets and platforms.

How does crypto arbitrage work?

Crypto trades on many venues at once, and each one has its own buyers, sellers and order book. Prices usually move together, but not perfectly. Kraken lists several forms of arbitrage:

• Cross-exchange. Buying on one centralized exchange and selling on another.
• Spatial. Exploiting gaps between regions, where local demand or capital rules push prices apart.
• Decentralized. Trading the gap between a decentralized exchange, whose price comes from its own liquidity pool, and a centralized one.
• Triangular. Cycling through three trading pairs, such as BTC to ETH to USDT and back, when their prices do not line up.
• Spot versus derivatives. Trading the gap between a coin's price and its futures price, sometimes to collect funding payments.

On blockchains, arbitrage overlaps with MEV, the value captured by reordering transactions. Some on-chain arbitrage is funded with flash loans, which are borrowed and repaid within one transaction.

Profiting is harder than it sounds. Price gaps tend to close quickly because many traders chase them. Kraken lists the main obstacles: trading and withdrawal fees, deposits that take hours to credit, slippage in thin markets, and withdrawal limits or identity checks that can trap funds. Holding money on an exchange also carries the risk of a hack or insolvency.

What is the kimchi premium?

The kimchi premium is the name for times when bitcoin and other coins trade higher on South Korean exchanges than on exchanges elsewhere. The Block attributes it to South Korea's capital controls, which limit money moving in and out of the country, along with anti-money-laundering rules that make the gap hard to exploit. Buying abroad and selling in Korea can look profitable on paper but is often not in practice.

Is crypto arbitrage legal?

Buying on one exchange and selling on another is generally ordinary trading. Problems arise when the method breaks other laws. In 2022, South Korean customs authorities arrested 16 people over alleged foreign exchange violations linked to the kimchi premium. One suspect allegedly set up shell companies to send money abroad, buy crypto and resell it in Korea at a higher price, The Block reported.

What do crypto arbitrage scams look like?

Arbitrage is a popular cover story for fraud. In January 2024 the CFTC warned about schemes claiming that AI trading bots or crypto arbitrage algorithms produce reliable gains, sometimes advertising enormous returns or a 100% win rate. The agency said high or guaranteed returns are red flags. Crypto trading bots explains how real bots work.

Rules differ by country and change often. Check the regulator or a qualified professional for your own situation.