Arbitrage involves trading one cryptocurrency for another, or trading the same cryptocurrency on different exchanges. This method is preferred by people who are accustomed to day trading, and have an even higher appetite for risk than those who are simply day trading.
Being a hands-on trader reveals many imbalances in the market, and thus opportunities for profit each day.
For example, let’s assume XYZ coin is priced at ₹10 on one exchange and at ₹11 on the second. A person could then buy ten XYZ coins on the first exchange at ₹100, transfer the coin to the second exchange, and then sell the cryptocurrency for ₹110.
The absolute gain would seem to be ₹10. However, transaction costs could eat away as much as ₹8 and leave investors with a profit of only ₹2.
This is similar to how investors play fiat currencies against each other in traditional currency markets.
There could be more complex routes, such as transferring value between three currencies on the same exchange, to end up with a larger quantity of the first currency. This is usually done when the value of newer cryptocurrencies rises or falls considerably within minutes.
In other instances, ‘stablecoins’ whose value remains ‘tethered’ to specific national currencies – like Tether (USDT) which will remain at 1 USD – may be useful to benefit from imbalanced prices.