Traders have engaged in arbitrage long before the emergence of the crypto market. At its most basic, arbitrage means that a trader capitalizes on the non-uniformity of the price of an asset across multiple markets. In essence, if the price of asset x is different on two different exchanges. A trader can buy the asset on one exchange at a cheaper rate and sell it on the other platform at a slightly higher price.
Whilst the occurrence of market inefficiencies is far more infrequent in traditional financial markets, the opposite seems to be the case in the crypto market. This is due to the way in which the cryptocurrency exchange sector functions. These platforms tend to run siloed systems, resulting in uncorrelated pricing. Therefore, over the years, arbitraging has become one of the go-to strategies for crypto traders.
A low correlation in the pricing of an asset across multiple exchanges is indicative of market inefficiencies, which traders – in this case, specifically arbitrageurs – can potentially profit from.