A week ago I wrote about compound interest in simple terms and decided to continue this initiative, which is to explain some financial terms as simply as possible. It's like I'm sitting down with a close friend who doesn't understand anything about finance, but wants to understand. Wants to understand at least a little bit about the whole financial bacchanalia. First post: Compound Interest In Simple Words
Today I would like to talk about arbitrage, because I myself have heard this term for a long time and it seemed incomprehensible to me, until I looked into LeoGlossary from LeoFinance. As a reminder, this is a resource inside Hive, created by LeoFinace, for learning about classic finance, cryptocurrency, cryptogames and everything related to it.
The term itself is very simple, but let's see what we can do with this gained knowledge. Let's go!
Arbitrage
LeoGlossary tells us that arbitrage is buying of an asset on one exchange and selling it on another. Here we could finish, but what for do ordinary users or exchanges need it? This question is also briefly answered by LeoGlossary.
Arbitrage is an important part of the price discovery process as traders look to leverage when prices get out of alignment.
That's where it's not immediately clear to me. I think people who are not familiar with finances do too. If you take away all the words that confuse me (and they are almost all words), it is the balancing of prices on all exchanges, which allow you to buy or sell this asset. That is, if the price of the asset is different on two exchanges, then we only need to buy this asset on one exchange, and sell it on the other. Thus we equalize the prices on both exchanges.
In simpler terms, it is the principle of the ancient bowl scale. If you transfer part of the weight from one bowl to the other, you can achieve a complete balance. Exchanges are scales, arbitrage is what we do to balance those scales.
But why do WE need it? It's very simple, if you buy bitcoin on one exchange for 16000 and sell it on another exchange for 16100, you will get profit 100$ minus percentage of exchanges fees. This way we or the market maker can make our profit, balancing these scales in a natural way.
Arbitrage on Hive
We have our own exchange, Hive-Engine (or its counterparts TribalDEX, LeoDEX, BeeSwap). Right now you can buy bitcoin, Ether, BNB, LiteCoin, and many others there. They are all called the same, but with the prefix SWAP. Yes they are the same assets, just wrapped in a Hive shell. So, if you can buy cheaper at Hive, and sell more expensive elsewhere, you can get your profits from arbitrage.
It's not as easy to do now as it was a few years ago, but you can convert those actions and do "time arbitrage". That's what I called it for myself, please don't scold me if you don't like this term or my thoughts. These are just my thoughts...
So, if you believe in Hive and are convinced it will be worth 50 cents, $1 or even $10. Then now is the time to exchange your HBD that you get from your publications to exchange it back for HBD when the price reaches your coveted rate. You can do the same with any coin that trades within Hive at Hive-Engine
Arbitrage in life
Yes, you probably already guessed that entrepreneurs have been using arbitrage for a long time and every day. That's why the price of fruit in a tent near your home is much more expensive than in a wholesale store several kilometers away from your home. But remember, you are overpaying for not wasting your time and energy on the trip. That time and effort is being spent by other people, earning small amounts of money.
Arbitrage everywhere
In fact, we live in a world that constantly balances the scales, no matter where you are in the world. This is just as true of the economies of different countries as it is of natural phenomena. If it rains or snows somewhere, in another part of the world the sun evaporates that water. If one country's economy rises or falls, it is counterbalanced by flows of money or goods from other countries. This is especially felt in neighboring countries. This world is a vintage bowl scale bigger than we think. Just look around...
That's all for now!
Peace and Hive On!
