Arbitrage is designed for exploiting price discrepancies across various markets or related financial instruments. It is a cornerstone strategy for traders who seek risk-free profits. As we drive deep into 2025, the landscape of arbitrage trading continues to evolve and change. Arbitrage in 2025 is mainly influenced by several factors, including technological advancements, Trump tariffs, regulatory changes, and overall market dynamics. The introduction of cryptos made arbitrage strategies very popular. However, the recent introduction of BTC ETFs made investors question, once again, if arbitrage strategies are still profitable across various markets. Let’s explain the current state of arbitrage opportunities and highlight some of the popular methods to define whether arbitrage is still viable in today’s financial environment.
What is arbitrage?
Arbitrage is the simultaneous purchase and sale of an asset in different markets or exchanges to profit from slight price differences in the asset’s listed price. There are several types of arbitrage employed by trades; let’s explain each of them for clarity. The markets where traders can use arbitrage are not limited to cryptos only. Traders widely use these strategies in various markets such as stock markets, FX pairs, and so on. For example, an arbitrage in FX trading involves profiting from price discrepancies in currency pairs across different brokers and markets. FX traders might use triangular arbitrage, simple arbitrage, or latency arbitrage.
Triangular arbitrage
Triangular arbitrage exploits price differences between three related currency pairs. For example, converting USD to EUR, then into GBP, and finally back into USD again. If exchange rates are misaligned for some reason, traders can generate risk-free profits with this method.
Market arbitrage
This is the simplest form of arbitrage, where the trader buys an asset in one market where it is undervalued and sells it in another where it is more expensive. For example, when BTC is cheap in one exchange, a trader might buy BTC there and sell in markets where it is more expensive. This was an effective strategy some time ago when cryptos tended to have serious price differences between different crypto exchanges, enabling speculators to make money with low risks. For example, in South Korea, the BTC price is always different from other markets and exchanges, and while it is difficult to implement, theoretically, traders can make money if they somehow manage to buy somewhere else and sell on South Korean exchanges or vice versa.
Merger arbitrage
Merger arbitrage is when a trader purchases stock of a company being acquired and shorts the stock of the acquiring company. This way, traders can capitalize on the price convergence as the merger finalizes.
Convertible arbitrage
This involves buying convertible bonds and shorting the underlying stock, profiting from price inefficiencies between the two. Convertible arbitrage requires more experience than market arbitrage and an understanding of bonds and underlying assets. Without proper knowledge of markets, you want to implement arbitrage strategies. It will be very risky to deploy these strategies.
Statistical arbitrage
Statistical arbitrage employs quantitative models to identify and exploit statistical price deviations between related but not identical securities. For example, statistical arbitrage involves pairs trading when a trader identifies correlated stocks (Pepsi and Coca-Cola, for example). If the price relationship diverges, one stock becomes relatively overvalued and the other undervalued. The trader then shorts overvalued stock and buys the undervalued one. In this scenario, the trader bets that prices will revert to their historical mean.
Hedge funds also employ market-neutral strategies where they use statistical models to identify underpriced and overpriced stocks across sectors, and then simultaneously going long on undervalued stocks and short on overvalued ones to hedge against market risks.
Top firms employing arbitrage strategies
There are several famous cases when companies employed arbitrage strategies successfully and made large profits.
Millennium Management
The company was founded in 1989 by Izzy Englander, and since then, the firm has grown into a 76 billion USD hedge fund. It delivered an average annual return of 14%. The firm employs a multi-strategy approach, like merger and convertible arbitrage. It is currently exploring expanding ownership to top executives to ensure long-term stability and survival.
Saba Capital Management
Saba Capital Management, led by Boaz Weinstein, is known for its investment and arbitrage strategies. The firm recently started to get involved in the UK investment trust industry and aims to exploit price gaps and employ complex derivatives to generate returns.
Pythagoras Investments
Pythagoras Investments is a crypto hedge fund that has used arbitrage effectively within crypto markets. Its arbitrage fund reported 15% gains year-to-date, which indicates the potential of arbitrage in the volatile crypto markets.
GSA Capital
GSA Capital was originally a hedge fund and later transitioned to a private trading firm in 2021. It focused on systematic trading across equity, futures, and FX markets globally. The firm is an expert in statistical arbitrage and leverages quantitative models to identify trading opportunities.
Arbitrage in crypto markets
It is impossible to talk about arbitrage and not mention digital currencies. Since there exist many different exchanges, including decentralized and centralized, there are always price inefficiencies. This typically gets exploited by crypto arbitrage traders. Many of these traders employ automated trading systems to instantaneously catch opportunities and capitalize on them.
Crypto markets present unique arbitrage opportunities as they are mostly fragmented. There are several methods arbitrage traders exploit price inefficiencies in crypto markets:
- Cross-exchange arbitrage – Traders buy crypto on one exchange where the price is lower and sell it on another where the price is higher.
- Triangular arbitrage – Similar to FX triangular arbitrage, this involves trading between three cryptos to exploit discrepancies in their exchange rates.
- Decentralized Finance (DeFi) arbitrage – DeFi arbitrage involves exploiting price differences between decentralized exchanges (DEXs) and centralized exchanges (CEXs) to make profits.
When we explain crypto arbitrage, we have to mention flash loans, which are unique to crypto markets.
Flash loans
Flash loans enable smart contracts to take a loan and repay it within one transaction. Using flash loans, traders can program smart contracts that scan exchanges for opportunities, borrow cryptos using flash loans, and then execute swaps all within one transaction. Flash loans are unique to crypto because only a handful of platforms offer them to their users, such as Aave (Ethereum, Polygon, Avalanche), dYdX (Ethereum layer 2), Uniswap V3 (Ethereum, Polygon, Arbitrum), and so on. Traders can develop smart contracts to track several exchanges and a multitude of prices, and when opportunity presents itself, they use flash loans to increase their trading power, just like leverage in traditional financial trading.
The future of arbitrage
In 2025 and beyond, several factors can influence the viability of arbitrage trading.
Technological advancements and the integration of AI and machine learning have revolutionized arbitrage trading. These technologies enable fast identification and execution of opportunities. The technological edge will remain crucial in markets where price discrepancies can vanish within seconds and only sophisticated robots can capitalize on them. Increased participation from institutional investors makes markets more efficient, reducing chances of detecting arbitrage opportunities. HFT (High-frequency trading) has contributed the most to increasing market liquidity and eliminating price discrepancies across various markets and exchanges. Crypto space has been a subject of increased regulatory scrutiny, which usually leads to fewer opportunities for arbitrage and other strategies. However, global differences in regulations, tax policies, and overall economic conditions can create new arbitrage opportunities (Cross-border arbitrage). However, as more and more investors become aware of these opportunities, fewer discrepancies exist. This is true for the South Korean kimchi premium phenomenon.
