Risk-Free* Profit: The Arbitrage Guide
The Only "Free Lunch" in Finance
Arbitrage is the art of buying low in place A and selling high in place B instantly. In prediction markets, it's simpler: it's math.
Strategy #1: The "Sum > 1" Rule (Negative Risk)
In a properly functioning market, the probabilities of all mutually exclusive outcomes should sum to 100% (or $1.00). Sometimes, panic or irrational exuberance breaks this.
The Setup: Imagine a "Republican Nominee" market. If you add up the "NO" prices for every candidate and the total cost is less than $1.00 (minus fees), you buy "NO" on everyone. One of them must win, meaning all other "NO" shares pay out. You are mathematically guaranteed a return.
Strategy #2: The Semantics Spread
Markets are literal. Sometimes two markets track the exact same event but are phrased differently.
- Market A: "Will BTC > $100k in 2025?" trading at 40¢.
- Market B: "Will Bitcoin hit $100,000 before Jan 1, 2026?" trading at 45¢.
Buy YES on A, Buy NO on B (or vice versa depending on the mechanics). Capture the 5¢ spread. It's tedious, but it works.
*The Asterisk (Risks)
Nothing is truly risk-free without caveats. Watch out for:
- Liquidity: Can you get enough money down to make the effort worth it?
- Resolution Rules: Read the fine print. Does "2025" include Dec 31st 11:59 PM?
- Gas Fees: Don't spend $5 in gas to make $2 in arb profit.