[JumpCrisscross]

> To be fair, all arbitrage is?

You are correct--there is no such thing as "risk free". By convention, we mark our zero point at the risk of sovereign bonds. It is the smallest risk everyone in our economy agrees on a level for. It still contains "risk". But it's a convenient--and practical--reference point.

The analog in Bitcoin would be getting your transaction committed to the blockchain. It's still "risky". (Quantum computers could break the encryption!) But it's a convenient--and practical--zero. (You'll notice the advantage of a currency backed by a debt-like obligation. Interest rates come as a first-class function. There is no "risk free" borrowing rate in Bitcoin.)

Between these zeros, an arbitrage would require, simultaneously, committed transactions on the Bitcoin ledger and immediately-available funds in an FDIC-insured (or analogous, e.g. SIPC) account. That is not something exchange-based trading, which involves depositing U.S. dollars and/or Bitcoins with the exchange in exchange for an IOU, permits.

[wc-]

For whatever reason I always get too tempted and have to jump into these crypto-arbitrage posts that appear on here about twice a month.

This is by far the most informed reply I've seen in all those threads I've read.

Especially wanted to highlight the last two sentences: there is no way to do risk-free arb in crypto due to counter party risk with exchanges. Even if it might seem small, it isn't small! The opportunity size, scale, roi, etc need to outweigh that risk and (despite playing in this sandbox which I guess makes me a hypocrite but w/e, just trying to help...) I don't think it is worth it right now.

[qubex]

That’s actually a bit of a loaded argument... we assert that all arbitrage profit must be at least counterbalanced by various kinds of risk (including liquidity risk, counterparts risk, & cetera) because we're assuming that we're operating in an efficient market. We should actually reason the opposite way around: analytically evaluate all sources of risk, compare it to the expected profit, and if the latter is no greater than the former, deduce that we are in an efficient market.

[JumpCrisscross]

> we're assuming that we're operating in an efficient market

Arbitrage is, by definition, the refutation of a strong-form efficient market [1].

> liquidity risk, counterparts risk

The presence of these risks betrays the absence of a true arbitrage. A pure arbitrage involves simultaneous execution, thereby negating liquidity risk. It also involves instantaneous settlement, thereby negating counterparty risk. In the real world, I've only seen it in specialized real-time foreign exchange and money markets.

The risk you can't get rid of is the "risk-free" risk. If the U.S. government blows up, you will not make money on your triangular arbitrage [2].

> analytically evaluate all sources of risk, compare it to the expected profit, and if the latter is no greater than the former, deduce that we are in an efficient market

This is an interesting area of theoretical finance [3]. It is practically useless. There is no list of "all sources of risk," much less any way to price it.

[1] https://www.investopedia.com/terms/s/strongform.asp

[2] https://en.wikipedia.org/wiki/Triangular_arbitrage

[3] https://en.wikipedia.org/wiki/State_prices

[qubex]

I used my terms woefully imprecisely and you were right to point those inaccuracies out.

Incidentally, [3] is very close to my field of research back when I was doing postgraduate studies in economics, but as you mention, it has close to zero applicability.