Arbitrage
How do traders make money from the same asset trading at two different prices at the same time?
In plain words
Arbitrage is buying an asset in one market and simultaneously selling it in another where the price is higher, capturing the gap between the two prices rather than betting on which way the asset will move. The classic version needs no price change at all, only a temporary difference between two venues or contracts.
Why it matters
Arbitrage keeps prices across markets tied together, because traders close the gap as soon as it opens. For someone taking risk, it matters because the gaps are usually small relative to fees, funding and transfer delays, so the trade only works when those costs are counted. It also explains why related prices move in lockstep.
In a real week: ETH, week of 8 February 2021
In the week of 8 February 2021, ETH perpetual funding averaged 0.1372% per eight hours and reached 0.2844%, while ETH closed the week at 1800.42, up 11.73% from its open of 1611.46. Positive funding means longs were paying shorts to hold, which points to the perpetual trading above spot; buying spot and selling the perpetual would have collected that payment each funding window without taking a directional view on ETH's 19.68% weekly range.
A common mistake
Thinking arbitrage is risk-free money. The price gap can widen before it closes, and fees, funding and execution timing all eat into a gap that is often only a fraction of a percent.