Bitcoin arbitrage is the buying of bitcoins on an exchange where the price is very low and selling it at an exchange where the price is relatively higher. The prices of Bitcoin vary on various exchanges, due to the fact that the markets are not directly linked, and the trading volume, on many exchanges, is low enough that the price does not adjust to the average right away.
Here a great video by Andreas Antonopoulos about why these arbitrage opportunities even exist:
A Simplified Example of a Bitcoin Arbitrage Opportunity
The price of Bitcoin on Coinbase is $650 and the price of Bitcoin on BTC-E is $636, the difference between the prices is $14, and this is quite a decent opportunity for arbitraging. Lets say, you buy 100 bitcoins on BTC-E at the rate of $636 each and subsequently, you sell them at Coinbase at the rate of $650 each, you make $14 per Bitcoin. Lets get down to the math
Number of Bitcoins bought in BTC-E = 100
Price of each Bitcoin = $636
Total price = $636 * 100 = $63,600
Number of Bitcoins sold in Coinbase = 100
Price of each Bitcoin = $650
Total = $650 * 100 = $65,000
Total profit = $65,000 – $63,600= $1,400
Thus, you can see that Bitcoin arbitrage seems like a wonderful opportunity to make some passive income, but there are a few barriers to it.
Barriers to Bitcoin Arbitrage
- The time it takes to verify each of the transactions (buying and selling) can add up and the exchange rate might change within that timeframe.
- Many exchanges require a lot of verifications in order to trade a large number of Bitcoins.
- Depositing fiat currency can be a time taking process (can take up to 10 days depending on your payment method).
- Many exchanges have fees, which I have overlooked in the given example, that you should take into account.
- Pay attention to the transaction volume on each exchange as you may end up not being able to sell all of the Bitcoin you bought at the cheaper exchange.
- Price differences also reflect an exchange’s reputation. For example, BTC-E’s exchange rate is lower these days because less people are trusting the exchange to handle their money correctly. Less trust = less buyers = lower exchange rate. The same thing happened during the last days of Mt.Gox where the price was lower and lower because people didn’t trust the exchange to allow them to withdraw their money.
A Detailed Bitcoin Arbitrage Calculator
So now let’s take the real live example (not a simplified one) and actually include all of the different fees that are involved in such an arbitrage. Those fees include:
- Fiat deposit fees
- Fiat withdrawal fees
- Bitcoin deposit fees
- Bitcoin withdrawal fees
- Transaction fees
I’ve taken the liberty to create some sort of calculator using Google spreadsheets just to show you how hard it can be to actually create a profit. Take a look below:
If you want to clone this calculator yourself feel free to download it at this link. All of this suggests that Bitcoin arbitrage is quite a difficult task. If you play around with the numbers a bit you’ll see that if the spread (difference between buy and sell values) grows a bit larger you start to become profitable. But in the current state we are actually losing money in the process.
However, if you look even further into the calculator’s data you’ll see that BTC-E takes up to 10 days to receive your deposit. In that time the spread can change. So the best tactic would be to keep some fiat currency in the exchange before hand and choose the right time to execute the arbitrage.
Should I Try to Arbitrage Bitcoin?
If you have some extra BTC, or cash, then you’re welcome to try it yourself. As long as you are careful, and set strict guidelines for when, and how, you will engage in this process. Unlike speculation, margin trading, and other activities that can be viewed as market manipulation, and in some cases, may even be truly harmful to the market as a whole, arbitrage is a positive process.
Bitcoins should not cost varying amounts across each exchange, especially consider that all of the exchanges can be accessed from one’s computer. Arbitrage simply brings the exchanges together to an average price. As Bitcoin’s market grows, the gap between exchanges will narrow, as the rate at which people arbitrage increases. The current volume can certainly help an individual make a significant amount of cash, but it is not yet worthwhile for large financial firms to engage in Bitcoin arbitrage directly.
Overall, Bitcoin arbitrage may be an opportunity to make some passive income but at the same time, it has risks. Moreover, almost all exchanges have an API and these can prove to be very prosperous for you. Utilizing these APIs will give you the tools you need to create a custom arbitrage bot, or hire someone to do it for you. Still, even attempting to arbitrage manually can be very beneficial, as long as you watch closely, and make sure you are placing simultaneous trades.
My personal opinion is that if you want to make some real profit from arbitraging you have to become an arbitrage professional. You probably won’t be able to arbitrage successful on your first or second try. Like everything else it takes practice, patience and experience. If you’ve had any experience with Bitcoin arbitrage I’d love to hear it in the comment section below.