ModulTrade, one of the first Blockchain based trade platforms developed to support micro, small and medium enterprises (MSMEs) is taking you through the history of arbitrage. Discover its ancient roots, the way it’s been developed over time, and how it now takes part in Blockchain based transactions, demonstrated through ModulTrade and its products (MT Market, MT Wallet, MT Exchange).
What is arbitrage ?
Arbitrage is defined by the simultaneous purchase and sale of an asset to profit from an imbalance in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms.1
But how does arbitrage really work?
Example of arbitrage application
Suppose an asset, gold, is quoted at Rs 27,000 per 10 gm in the Delhi bullion market and at Rs 27,500 in the Mumbai bullion market. A trader may buy 10 gm of gold in Delhi and sell it in Mumbai, making a profit of Rs 500 (Rs 27,500 — Rs 27,000). However, this trade will be profitable only if the cost of transactions is less than Rs 500 per 10 gm of gold.
In the above example, assuming that the total transaction cost of executing the trades and physical delivery of gold is Rs 200 for 10gm, then the net profit for the trader would reduce to Rs 300.
If the price difference between the two bullion markets reduces to Rs 200 (or less than that) per 10gm of gold, then the arbitrage opportunity between the two markets shall cease to exist, as the transaction costs shall be equal to, or more than, the price difference between the two markets.4
It is widely known in the trading world and has become very popular, especially in the digital world, as a way to get some extra money without taking too many risks. However, before it reached the digital world, do we actually know what it used to be and where it comes from?
History of arbitrage
Arbitrage wasn’t born with the age of the internet. Available evidence of its origin is primarily from the Middle East and suggests that mercantile trade in ancient markets was extensive and provided a number of avenues for risky arbitrage. Potential opportunities were tempered by: the lack of liquidity in markets; the difficulties of obtaining information and moving goods over distances; and, inherent political and economic risks. Trading institutions and available securities were relatively simple. Circa 1760 BC, the Code of Hammurabi dealt extensively with matters of trade and finance.2
Arbitrage has obviously evolved subsequently to become a common practice in trading, even for people not having any financial background.
Although, among the general public, confusion about the nature of arbitrage permitted Bernard Madoff to use the illusion of arbitrage profit opportunities to attract ‘hedge fund investments’ into the gigantic Ponzi scheme that collapsed in late 2008.2 He was sentenced to 150 years in prison for running the biggest fraudulent scheme in U.S. history. Even now, only a few of his victims have since regained all of their losses.3
Getting your hands on arbitrage
Several tools and tutorials are available on YouTube. If you’d like to start slowly, ModulTrade recently launched its MT Academy, a new digital educational tool and one of the first hubs where anyone with any level of goods trading experience can have access to several supporting services.
Features of the MT Academy includes instructional content including trade techniques, how to use the MT Market, open an MT Wallet, helpful videos and much more.
There is no doubt that arbitrage will perpetuate in years to come. It has evolved, and will keep on evolving along with development of new technologies as it has done with the Blockchain.
The only thing that could actually stop it would be a world where the currency is the same everywhere, as well as the prices.
Start today on ModulTrade, comment and share!
1 https://www.investopedia.com/terms/a/arbitrage.asp
2 https://www.valuewalk.com/2015/09/arbitrage-historical-perspectives/
3 https://www.businessinsider.com/how-bernie-madoffs-ponzi-scheme-worked-2014-7?IR=T
Source: Crypto New Media
