Quote from: Divitiae miserae on December 13, 2015, 12:40:30 AM

Arbitrage is to place what speculation is to time.
I don't see how the method you have outlined would work: you don't level communicating vessels obstructing the connection.

Suppose that you have 10 BTC and 5000 USD in each of the exchanges X and Y. Suppose that the price has been rock solid at 500, with plenty of liquidity and tiny spread, in both exchanges. Your total worth is 20 BTC and 10000 USD.

Price drops in exchange X, and you see an ask of 1 BTC at 490 there. You buy 1 BTC at X for 490 and sell 1 BTC at Y for 500. Suppose that it raises the price at X back to 500 BTC.

You now have 11 BTC and 4510 USD at X, 9 BTC and 5500 USD at Y. Your total worth is now 20 BTC and 10010 USD -- you made a 10 USD profit.

That is the basic idea. But you can buy and sell different amounts of BTC at each exchange. If you buy where the price is lower and sell where it is higher, you can increase your net worth and push the prices towards equality. Note that you don't need to transfer BTC or dollars, as long as you have reserves at both ends.