Source: Kinesis money
Summary. Arbitrage means to trade the same asset in different markets, with the main aim of making a profit, by making use of minor differences in the assets list price. A peek into SBF’s arbitrage adventures such as the kimchi premium and Japanese market bitcoin arbitrage.
Jargonism is a heavily prevalent practice in today's dynamic business environment. Its importance cannot be overstated mainly because of its range of use. From the smallest startup meetings to the boardrooms of the biggest companies in the world, you will find it everywhere. Which is why it is so important for you to familiarize yourself with these complications.
One of these complications is Arbitrage.
Arbitrage means to trade the same asset in different markets, with the main aim of making a profit, by making use of minor differences in the assets list price. For Example – you buy 1,000 shares of Company A at ₹5.00 at BSE ( Bombay stock exchange) and sell them at ₹5.05 at the NSE (National Stock exchange).
You made a gain of (5.05-5.00)* Number of Shares
i.e. 0.05*1,000 = 50 here.
You must be wondering about how the same asset is listed on different markets for different prices? This is due to inefficiencies in the market. Arbitrageurs exploit these inefficiencies in order to pocket profits. Although while pocketing these profits they also make the market more efficient. The lower-priced assets are bid up and the higher priced assets are sold off, narrowing the price difference in both markets. It is also to be noted that arbitrage opportunities provide themselves only for a short window for which arbitrageurs need to be ever present in order to claim their risk free profits.
Sam’s arbitrage treasure hunt
Sam Bankman-Fried (SBF), a very talked about figure in the world of finance, made use of multiple arbitraging techniques to build up massive amounts of wealth for himself.
One opportunity he made use of was the Kimchi Premium. While Bitcoin was priced at $10,000 in the US, it traded for almost $15,000 in the Korean markets due to its high demand. SBF cultivated sizable profits through exploiting this inefficiency although due to strict regulating of the Korean won it was difficult to scale this arbitrage.
SBF also made use of inefficiencies in the Japanese exchange. After buying bitcoin for $10,000 in the US, he could then list it for $11,500 in the Japanese exchange market. This technique, unlike the Kimchi premium, was capable of being executed at a much larger scale but required a lot of sophistication to execute.
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