Why would volatility be a problem for arbitraging?

[adrianog]

Hi

Thanks for the useful resource.

Question:
You seem to imply that high volatility is not conducive to fruitful arbitraging, whereas my understanding was the opposite - that the volatility is creating the arbitrage opportunities.
Would you mind expanding on the topic?

Many thanks

[kelvinau]

That is true, in some way. High volatility creates a lot of arbitrage opportunities to an extent. When there's no limit how much the price can go up or down, that's a different story. Take bitcoin as an example. It reached $19k in December and dropped to $12k in two weeks. Let's say you had 1 BTC (worth $19k in Dec.) to begin with and you spotted a lot of arbitrage opportunities. You made 0.5 BTC in two weeks, so at the end you would have 1.5 BTC, but that would be worth only $18k ($12k * 1.5). What did you earn? You actually lost $1k because of the huge price dropping. Of course if you made more BTC, you would probably be still earning, but just making less profit - only if there were a lot of opportunities. Some can say that you should never hold BTC, or should convert some to fiat currency immediately or regularly, but that will be another discussion of fiat-to-crypto conversion.

Now it's relatively more stable than in December. I think It could be a good time to re-look at the opportunities. As always, trade at your own risk.