The fact that eachBitcoin exchangeshows a different price for Bitcoin has given birth to the arbitrage phenomena. In this post Ill explain exactly what arbitrage is and how it is conducted.
Bitcoin arbitrage is the process of buying bitcoins on one exchange and selling them at another, where the price is higher. Different exchanges will have different prices for Bitcoin, and some people manage to take advantage of this and generate profit out of thin air.
Thats Bitcoin arbitrage in a nutshell. If you want a more detailed explanation of Bitcoin arbitrage and how its conducted, keep on reading. Heres what Ill cover:
Before we can talk about arbitraging (i.e. buying at a low price and selling at a high price) we need to understand what Bitcoins price really means.
On any exchange, the price of Bitcoin is determined by the last trade done on that exchange. Since different exchanges have different amounts of buyers and sellers with different preferences, its only natural that prices wont correlate 100%.
You can view exchanges as closed markets that arent directly linked. On top of that, some exchanges have very low trading activity on them which makes Bitcoins price on them much morevolatile.
As a result, some people try tobuy Bitcoinsfor cheap on one exchange and then sell them at a higher price on another exchange. Here is a great video by Andreas Antonopoulos about why arbitrage opportunities exist:
Lets take a simple arbitrage example in order to illustrate how arbitrage is done. At the time of writing, the price of Bitcoin onBitstampis $11,561 while the price of Bitcoin onCEX.iois $11,645.
The difference between prices is $84, and this is quite a decent opportunity for arbitraging. Lets say, you buy 100 bitcoins on Bitstamp at the rate of $11,561 each, and subsequently you sell them on CEX.io at the rate of $11,645 each.
In a perfect world youd make $87 per Bitcoin.
Number of Bitcoins bought in Bitstamp 100
Total expenses $11,561 * 100 $1,156,100
Total revenue $11,645 * 100 = $1,164,500
Total profit $1,164,500 $1,156,100 =$8,400
An interesting thing to notice from the example above is that we need a relatively large amount of capital in order to make a substantial profit via arbitrage. However, in real life things are more complicated than the simplified example above.
When trying to arbitrage youll probably encounter several setbacks:
It may take some time to verify transactions (to and from exchanges), and during this time the price of Bitcoin may change.
Many exchanges require considerable verification steps in order to trade alarge amount of Bitcoins.
Exchanges fees, which I have overlooked in the given example, will eat away at your profits.
Transaction volume need to be high enough on both exchanges to satisfy such large orders of buying and selling.
Keep in mind that price differences can also reflect technical issues or reputation issues of an exchange. An interesting example is what happened duringthe last days of Mt.Goxwhere the price of Bitcoin was extremely low since traders didnt trust the exchange to allow them to withdraw their funds (i.e. There werent many buyers on the exchange).
Now that you know what you will face in a real live Bitcoin arbitrage trade, lets take an example that includes all of the different variants and fees involved. Relevant fees include:
Ive taken the liberty to create some sort of Bitcoin arbitrage calculator using a Google spreadsheet to show you how hard it can be to actually generate a profit.
If you want to clone this calculator for yourself, feel free to make a copyusing this link. As you can see, my real world profit comes to about a $10K loss, while Ill need over $1.1M in capital. All of this suggests that making a profit through Bitcoin arbitrage is quite a difficult task.
In the case above, the main thing thats eating away at my profits is the withdrawal fee from CEX. Once you get to deal with such large amounts you can reduce your trading and withdrawal fees by using OTC (Over The Counter) services.
Keep in mind that he bigger the spread (difference between buy and sell values), the more profitable the arbitrage. However, it still doesnt amount to much unless you put large amounts of money at risk.
Another thing to take into account is that it can take up to 7 days for fiat deposits to appear on an exchange due to how slow the banking system is.
During that time, the spread can change drastically and eliminate any chance for arbitrage. So, the best tactic would be to keep some fiat currency on the exchange and choose the right time to execute the arbitrage.
Finally, any time you keep money on an exchange youre putting your money at risk, as exchanges getting hacked or going out of business is unfortunately still common these days.
As Ive demonstrated, youll need to keep a large amount of money on the exchange in order to be mildly profitable, so Im not sure its worth the risk.
Arbitrage is completely legal as the only thing that is being done is exploiting price gaps between exchanges. A person conducting arbitrage is just buying and selling as any other trader would do.
The act of arbitraging Bitcoin is not as simple as it may seem at first glance. Overall, Bitcoin arbitrage may be an opportunity to make some passive income, but at the same time it involves huge risks.
Arbitrage is actually a positive process, unlike speculation,margin tradingand other activities that can be viewed as market manipulation, and in some cases may even be truly harmful to the market as a whole.
Bitcoins should have the same price across all exchange. Arbitrage simply helps bring the exchanges together to the same page. As Bitcoins market grows, the gap between exchanges will narrow, as more and more people will conduct arbitrage.
As for the how, nowadays almost all exchanges have an API which can become a useful arbitrage tool.
Utilizing these APIs will allows you to create a custom arbitrage bot, so that you dont have to sit in front of the computer all day. Still, even attempting to arbitrage manually can be very beneficial, as long as you watch closely and make sure you are placing simultaneous trades.
If youve had any experience with Bitcoin arbitrage Id love to hear about it in the comment section below.
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Im truly looking for a good Arbitrage bot, are there any suggestions please.
Hi, have you ever heard of Plus Token? Or maybe take a quick look at it and share some review of the wallet. They said they make profit from arbitrage trading and share the profit with its users. Im skeptical and curious.
There is a good arbitrage opportunity between BitDirect and Luno in South Africa, last year it went as high as 35%. The catch is that South Africans need to use their R1m Foreign Exchange Allowance which BitDirect sorts out for you automatically.
A lot of the opportunities for Bitcoin has decreased but a lot more arbitrage opps in the altcoin markets have increased. I suggest everyone interested in arbitrage get an account at arbiswap. It does not use bots but it alerts you to price differences between exchanges.
In my opinion even a beginner can master arbitration. Nothing difficult. It is important to quickly compare courses, to catch holes. To do this, there are many bots. I use BibitBot, it sends notifications to Telegram. I buy cheap, but I sell more
Bitcoin arbitrage with India is very succesful. We have our own Zebpay international trading team set up for this. And we are looking for a few more trading members in India.
Cryptocurrencies arbitrage isnt profitable anymore, unless you know how to program and trade with extremely low latency bots that can outperform the domestic bots working on the exchanges servers(certainly not the junk sold in the retail); and even then it requires a 24/7 monitoring of the activity and constant adjustements of strategies and updates by developers as it a highly competitive business in a perpetual race The manual cross arbitrage ship has already sailed months / years ago, as the market as grown increasingly competitive and aggressive Id like also to emphasize that it is very easy to get badlyRead more
Hi, I would like to know what is the rough percentage of difference between both platform in order to profit from arbitrage. Also, what are the costs will be incur like fiat deposit fees, transaction fees, withdrawal fees and so on.
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