The Beginner’s Guide to Bitcoin Arbitrage

Last updated: 3/13/19

The fact that each exchange shows a different price for Bitcoin has given birth to the arbitrage phenomena. In this post I’ll explain exactly what arbitrage is and how it is conducted.

Post Summary

Bitcoin arbitrage is the process of buying  bitcoins on one exchange and selling them at another, where the price is relatively 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.

If you want a more detailed explanation of Bitcoin arbitrage and how it’s conducted, keep on reading. Here’s what I’ll cover:

  1. How Bitcoin’s price is determined
  2. A simplified example of Bitcoin arbitrage
  3. Barriers to Bitcoin arbitrage
  4. Bitcoin arbitrage calculator
  5. Conclusion – Should you try to arbitrage?

1. How Bitcoin’s Price is Determined

Before we can talk about arbitraging (i.e. buying at a low price and selling at a high price) we need to understand what “Bitcoin’s 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, it’s only natural that prices won’t correlate 100%.

You can view exchanges as closed markets that aren’t directly linked. On top of that, some exchanges have very low trading activity on them which makes Bitcoin’s price on them much more volatile.

As a result, some people try to buy Bitcoins “for 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:


2. A Simplified Example of Arbitraging Bitcoin

Let’s take a simple arbitrage example in order to illustrate how arbitrage is done. At the time of writing, the price of Bitcoin on Bitstamp is $3862 while the price of Bitcoin on CEX.io is $3949.

The difference between prices is $87, and this is quite a decent opportunity for arbitraging. Lets say, you buy 100 bitcoins on Bitstamp at the rate of $3862 each, and subsequently you sell them on CEX.io at the rate of $3949 each. In a perfect world you’d make $87 per Bitcoin.

Now let’s get down to the math:

Number of Bitcoins bought in Bitstamp – 100

Price of each Bitcoin – $3862

Total expenses – $3862 * 100 – $386,200

Number of Bitcoins sold on CEX.io – 100

Price of each Bitcoin – $3949

Total revenue – $3949 * 100 = $394,900

Total profit – $394,900 – $386,200 = $8,700

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.


3. Barriers to Bitcoin Arbitrage

When trying to arbitrage you’ll probably encounter several setbacks:

  1. It may take some time to verify transactions (to and from exchanges), and during this time the price of Bitcoin may change.
  2. Many exchanges require considerable verification steps in order to trade a large number of Bitcoins.
  3. Exchanges fees, which I have overlooked in the given example, will eat away at your profits.
  4. Transaction volume need to be high enough on both exchanges to satisfy such large orders of buying and selling.
  5. Keep in mind that price differences can also reflect technical issues or reputation issues of an exchange. An interesting example is what happened during the last days of Mt.Gox where the price of Bitcoin was extremely low since traders didn’t trust the exchange to allow them to withdraw their funds (i.e. There weren’t many buyers on the exchange).

4. A Detailed Bitcoin Arbitrage Calculator

Now that we know what we will face in a real live Bitcoin arbitrage trade, let’s take an example that includes all of the different variants and fees involved. Relevant fees include:

  • Fiat deposit fees
  • Fiat withdrawal fees
  • Bitcoin deposit fees
  • Bitcoin withdrawal fees
  • Transaction fees (i.e. trading fees)

I’ve 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.

Take a look below:

If you want to clone this calculator for yourself, feel free to make a copy using this link. As you can see, our “real world” profit comes to about $2,604 while we’ll need almost $400K in capital. All of this suggests that making a profit over Bitcoin arbitrage is quite a difficult task.

If you play around with the numbers a bit you’ll see that the bigger the spread (difference between buy and sell values), the more profitable the arbitrage. However, it still doesn’t 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 Bitstamp. 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.

Having said that, any time you keep money on an exchange you’re putting your money at risk, as exchanges getting hacked or going out of business is unfortunately still common these days. And as I’ve demonstrated, you’ll need to keep a large amount of money on the exchange in order to be mildly profitable, so I’m not sure it’s worth the risk.


5. Conclusion – Should you try to Arbitrage?

The act of arbitraging Bitcoin is as simple as it may seem at first glance. If you have some extra BTC or cash, you’re welcome to try it yourself. Still, it’s important to know what you’re up against before staring out.

Arbitrage is actually a positive 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.

Bitcoins should have the same price across all exchange. Arbitrage simply helps bring the exchanges together to the same page. As Bitcoin’s market grows, the gap between exchanges will narrow, as more and more people will conduct arbitrage.

Overall, Bitcoin arbitrage may be an opportunity to make some passive income, but at the same time it involves huge risks.

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 don’t 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.

My personal opinion is that if you want to make some real profit from arbitraging you have to make it your profession. You probably won’t be able to arbitrage successfully 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 about it in the comment section below.

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.

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Andrew
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Andrew

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.

Meagan A
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Meagan A

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.

Leon
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Leon

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

michael
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michael

how can i join arbitrage

Luc de Vries
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Luc de Vries

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.

Cedric
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Cedric

Cryptocurrencies arbitrage isn’t 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 I’d like also to emphasize that it is very easy to get badly… Read more »

Ranson
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Ranson

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.

Ron
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Ron

Hi, I have a question. If you do arbitrage between two exchange offices in the first one you buy, and the second you sell and cash out, isnt there going to be a problem or something at the second exchange office, that you only cash out at their site, but dont trade?

Thanks,
Ron

TalesFromTheCrypto
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TalesFromTheCrypto

I saw the volume of BTX rise dramatically today and the price was still unaffected. I knew a surge in price would follow the volume increase. BTX started around 14.50 when i noticed the volume +. Some exchanges had 14.16 while others were mostly aound 14.50-15.10. I tried to buy into BTX but couldnt figure out how to pay with fiat :( Right now BTX is at 18.01 but is still fluctuating on the exchanges from 16.79 up to 18.06 and the volume is still increasing. I wish i could figure out how to get 250 fiat into the market… Read more »

Ronen Cypis
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Ronen Cypis

Nice read, Thanks!