What is Locational Arbitrage?

Cryptocurrency users will be all too familiar with the concept of arbitrage. Users can exploit the price differences across exchanges in the hopes of making a semi-guaranteed profit. Although there are fees and specific withdrawal requirements to take into account when using fiat currency trading pairs. Locational arbitrage, as this type of activity is called, can make people a lot of people good money over time.

Locational Arbitrage Results In Good Profits

Most people will have heard about locational arbitrage, although they may not realize that is the official name for this type of trading behavior. The concept revolves around trading cryptocurrency – or other assets – across exchanges in different parts of the world. This can be a very lucrative business, assuming one has the necessary tools to open exchanges on all platforms and withdraw money accordingly.

To the world of cryptocurrency, locational arbitrage can prove to be an extremely successful way of trading. There are quite a few regions around the world where paying a premium for Bitcoin and other cryptocurrencies is considered to be normal. Japan and Korea, for example, are two regions that come to mind almost immediately. However, not everyone can take advantage of these platforms.

That is only to be expected, as exchanges in these regions require users to have a Japanese or Korean bank account. Without that information, withdrawing fiat currency from the platform is absolutely impossible. In fact, some companies don’t even allow for fiat trading without this information on file either. That is one of the downsides of locational arbitrage, unfortunately.

For the people who have access to properly set up accounts in these regions, locational arbitrage, we will result in semi-guaranteed profits. Buying cryptocurrency in the US or Europe and selling it in Japan or Korea will automatically result in profit. This is to be expected during the early days of the cryptocurrency ecosystem, although prices may balance out on a global scale over time.

This is what sets the cryptocurrency market apart from more traditional offerings. The forex market, for example, allows for little to no locational arbitrage whatsoever, since the spreads are marginal at best. Moreover, there are automated algorithms in place which check the markets for opportunities. Outplaying those algorithms is virtually impossible unless one gets very lucky. Such an algorithm does not exist in the cryptocurrency world (yet).

One thing to keep in mind when taking advantage of locational arbitrage is the trading fees across different platforms. In most cases, these fees will be much lower compared to the profit one can make from trading large quantities of cryptocurrency. Do keep in mind more people will try to take advantage of locational arbitrage as they become more aware of these opportunities. Moreover, wiring these foreign currencies out of the region the exchange is based in is subject to limitations as well.

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