A trader watching two screens saw the same token quoted at two different prices and moved instantly. That gap, however small, is the lifeblood of crypto arbitrage: buying on the cheaper venue and selling on the richer one. The mechanics are simple on paper but rely on a lattice of speed, liquidity and legal access. A study by Andrei Makarov and Antoinette Schoar 2020 at the National Bureau of Economic Research documents how latency, fees and exchange-specific rules create persistent spreads that professional traders exploit, even as automated bots compress opportunities.
Market frictions and speed
Exchanges are fragmented across technology stacks and jurisdictions, so order books do not update uniformly. Co-location, faster matching engines and proximity to network nodes give firms microsecond advantages; moving coins between platforms, settling trades and covering counterparty exposure involves time and cost. Bank for International Settlements 2019 highlights how differences in custody, onboarding and withdrawal procedures across providers widen effective price gaps between markets. The result is a layered market where some actors serve as quick arbitrageurs using stablecoins and on-chain transfers, while others provide slower off-ramp liquidity tied to fiat rails.
Territorial gaps and human patterns
Geography and regulation play a decisive role. Where capital controls, foreign-exchange scarcity or local demand surges exist, local prices can diverge markedly from global quotes. Chainalysis 2021 at Chainalysis shows regional patterns of exchange flows and premium markets, illustrating how traders in different cities respond to domestic pressures rather than a single global price. For a market participant in a city with restrictive banking, arbitrage is not only about technological speed but also about navigating local human realities: KYC delays, cash-on-delivery networks and informal brokers who substitute for slow fiat corridors.
Consequences for markets and people
Arbitrage compresses long-term price differences, improving price discovery and moving liquidity where needed, but it also concentrates technical advantages and risk. When funds are locked on insolvent platforms or when on-chain settlement is delayed by congestion, arbitrageurs can face unrecoverable losses and contagion. The National Bureau of Economic Research paper by Makarov and Schoar 2020 finds that even sophisticated strategies are exposed to exchange-level credit and operational risk. Regulators and operators must balance the benefits of tighter spreads against systemic vulnerabilities created by highly interconnected but unevenly regulated venues, a point underscored by analysis at the Bank for International Settlements 2019.
What makes crypto arbitrage distinctive is its blend of market microstructure and real-world frictions. Trades can move across the world in seconds while fiat settlement may take days; legal regimes vary by street address as much as by code. That mix creates opportunities for sophisticated algorithms and local intermediaries alike, shaping a market that is part technological arms race, part response to human and territorial constraints. Understanding those layers explains why price differences persist and why exploiting them is as much an exercise in engineering and compliance as it is in pure finance.
