Rebalancing

In all the documentation, you'll find the word "quote-asset" and "base-asset", it means the first and second asset of the pair you choose. For example, the base and quote asset of the BTC/USDT pair are respectively BTC and USDT.

Classic way of arbitraging

The basic principle of arbitrage is to buy 1 bitcoin at a low price (say $10,000) on one exchange, transfer it to another exchange where the price of bitcoin is at a higher price (say $12,000), and then sell it for dollars on that exchange. (Figure 1)

The profit is thus theoretically $2000.

Figure 1

Theoretically only because, first, in practice there are withdrawal fees for transferring cryptos from one exchange to another. Secondly, the transfer takes time, so the price on the second exchange may change (downwards) and there is a risk of loss if the opportunity disappears during the transfer (Figure 2). This classical way of arbitraging is better for large and persistent price differences, which is very rare.

Figure 2

Offline and instantaneous transfer

So the idea is to avoid having to transfer the cryptos. How do we do that?

Let's take the example with the BTC/USDT on 2 exchanges.

To do the offline and instantaneous transfer, you need USDT and BTC in each exchange. When an opportunity arises, buy BTC with USDT on exchange 1, and sell BTC from exchange 2 for USDT. (Figure 3)

It’s as simple as that, you just made an instant, tax-free transfer.

Figure 3