Arbitrage [Meaning] - MasterTerms.com

In practice, arbitrage works by analyzing the odds provided by different betting platforms for a specific event. When the odds are favorable, a gambler can place bets on all possible outcomes in such a way that the total amount wagered is less than the total payout. This ensures that, no matter what the outcome of the event is, the bettor will end up with a profit after accounting for the total stakes. It requires quick calculations and timely betting to capitalize on these opportunities before the odds change.

Arbitrage Example

For example, suppose there is a tennis match between Player A and Player B. Bookmaker 1 offers odds of 2.0 (even money) on Player A winning, while Bookmaker 2 offers odds of 3.0 on Player B winning. A bettor can wager $100 on Player A with Bookmaker 1 and $50 on Player B with Bookmaker 2. If Player A wins, the bettor receives $200 from Bookmaker 1 and loses $50 with Bookmaker 2, resulting in a net profit of $50. Conversely, if Player B wins, the bettor receives $150 from Bookmaker 2 and loses $100 with Bookmaker 1, again resulting in a net profit of $50. This illustrates how arbitrage allows for profit regardless of the match’s outcome.

Glossary: Arbitrage
Arbitrage is the practice of taking advantage of price differences for the same asset across different markets to make a profit.
Glossary: Flash Loan
A flash loan is a type of uncollateralized loan in cryptocurrency that allows borrowers to access a large amount of funds for a very short period, typically a single transaction.
Glossary: Miner Extractable Value [MEV]
Miner Extractable Value (MEV) refers to the profit that miners can make by selecting which transactions to include in a block and in what order.
Glossary: Pair
A pair in cryptocurrency and blockchain refers to the relationship between two currencies or assets that are traded against each other on an exchange.
Glossary: Trading Bot
A trading bot is an automated software tool that executes cryptocurrency trades based on predefined algorithms and market conditions.

Alternative Meanings:

Arbitrage
In cryptocurrency, arbitrage involves buying a digital asset like Bitcoin on one exchange where the price is lower and simultaneously selling it on another exchange where the price is higher. The difference in price, minus any fees, is the profit for the trader. Arbitrage opportunities can occur because of supply-demand imbalances, liquidity differences, or exchange-specific factors. It requires speed and precision to capture the price discrepancy before it closes.
Arbitrage Example
For example, if Bitcoin is priced at $50,000 on Exchange A and $50,500 on Exchange B, a trader could buy one Bitcoin on Exchange A and sell it on Exchange B, pocketing the $500 price difference (minus fees).