Value Arbitrage As A Business Model

Value arbitrage can come in different shapes or forms. But it is essentially taking advantage of the price difference between two markets of the same or similar product/service to generate a profit.

This is possible thanks to market efficiencies that create temporary fluctuations in price, giving market participants windows of opportunity for arbitrage.

Arbitrage has existed since the birth of markets. The most known is retail arbitrage. Most hustlers have done or came across it during their hustling phase. With the rise of internet usage, online arbitrage has emerged.

But this isn't limited to retail arbitrage 2.0 as in arbitrage through the buying and selling of physical goods or services on the internet. It has expanded beyond that.

There's this thing called 'travel arbitrage' in which travel websites are set up that scan the internet to find the best and most affordable travel deals, put a markup and repackage it a bit higher that the normal standard. And then sell it to their customers.

Of course, the same thing more or less can be done on many other industries. But how well does value arbitrage fare as a business model? What are the opportunities and challenges?

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Raining Money Heavily

I feel that the main opportunity with value arbitrage is the potential to earn high profits with relatively low risks or upfront investment. This is what draws most people to it. Sometimes, markets can move disproportionately in one direction giving rise to high returns when capitalize upon.

The low risks comes from not needing to own or produce the products. Basically, there's little to no overhead costs and business moves are executed only when there's concrete demand for it.

Demand itself is also an opportunity. Since there's no need to own or produce the products to trade with, a business can easily move across various markets based on the demand.

There are general purpose businesses that sell goods based on seasonal trends. I recently came across a local one called 'Everyday Enterprise'. In a way, it makes a business more adaptable to the changing needs of consumers.

But the opportunity I'm most interested in is the flexibility to choose from various markets and niches that suit one's skills and interests.

One isn't limited by any means when it comes to choosing their trade and they can personalize their business, so to speak, as they see fit. This works much better in arbitrage 2.0 than traditional arbitrage.

Where's My Stability?

Volatility is a double edged sword. Markets can be as unpredictable as the weather. High returns can easily turn into huge losses. Value arbitrage is more like timing the market than time in the market.

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When market prices change rapidly or unpredictably, they greatly affect the feasibility and profitability of the arbitrage.

Although chasing demand can be a great way to make profits consistently, there's also the risk of an inconsistent and unreliable revenue stream due to the constant changes in product offering. Usually, quality is also sacrificed for quantity.

Blue ocean, as in low competition quickly turns to red ocean, as in high competition, when 'fellow arbitragers' enter the market. This may gradually reduce the profit from price differences or eliminate other opportunities.

It's also hard to establish authority or monopolize a product that you don't own or produce. Good luck navigating copyright laws.

Fare Well

They say the bigger the chaos, the higher the opportunity. The challenges of value arbitrage seems chaotic and to a large extent, they are. The opportunities on the other hand, gives us elements of flexibility, massive gains and a north star to profit making.

When we put both together, we come away with the impression that everything basically hinges on adaptability. It is a key factor in surviving through the challenges and thriving through the opportunities.

On a time scale, the rewards outweighs the risk in the short term. But in the long term, it seems reversed.


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