What is Bitcoin arbitrage?

Basically, Bitcoin arbitrage is the act of buying Bitcoin at an exchange where the price is very low and selling it at a different exchange where the price is relatively higher. This act is widely practiced in many stock markets but it is not very profitable, reasons being: low profit margins. Because stock markets are very advanced compared to Bitcoin exchanges, the difference of prices in different markets is very small. It is not profitable unless you have a lot of money to practice arbitration.

Why Bitcoin arbitrage is risky?

Bitcoin has a public ledger called the blockchain which verifies each transaction, it usually takes time for a transaction to be confirmed if you want to arbitrage between two exchanges, it is going to take time.

Lets frame a situation and name it CASE 1:

If you find out that the price of Bitcoin in BTC-e was $265 and the price of Bitcoin in Bitstamp is $275, and you decide to arbitrage between BTC-e and Bitstamp, you would need to buy Bitcoins in BTC-e and you would also need to transfer them to your Bitstamp account which needs a certain amount of confirmations in the blockchain to be credited into your account. This can take time but even if it takes 10 minutes, the price can change rapidly and hence, you would lose your opportunity to arbitrage.

So, how do I get over this?

Well, this is very simple, you need have funds in both your accounts, that is BTC-e and Bitstamp so that you can immediately buy Bitcoins and sell them. You need to fund your account well in advance because

The second thing to take into consideration for Bitcoin arbitrage is fees, which also plays a crucial role. Different exchanges charge different amount of fees. BTC-e charges 0.2% and bitstamp charges 0.2% to 0.5% depending on the value of your monthly trade volume. Since you’re going to trade on two exchanges, you need to deduct fees in order to calculate your profits. If the difference between the prices is less than 1%, it is not worth doing arbitrage. You need to have a decent margin in order to practice arbitrage and manage a profit.

For example, in case 1, if you had $3000 in your BTC-e account and $3000 in your Bitstamp Account, and you buy 11 Bitcoins in BTC-e at the rate of $265 each

Buying in BTC-e

11 * 265 = $2915

Fees= 0.2%

Therefore, 0.2% of $2915 = $5.83

So, total amount spent = $2920.83

Selling on Bitstamp

11 * 275 = $3025

Fees (the fee varies depending on your volume, but lets take 0.5% for the sake of ease of calculations and understanding)       =  0.5%

Therefore, 0.2% of $3025 = $15.125

Therefore, $3025 – $15.125 = $3009.875

Therefore, net profit => $3009.875 – $2920.83

= $89.045

Alright, so if you identify nice opportunities to arbitrage Bitcoin, this would be a lucrative way to make money but, there are many more factors such as the money transfer into the exchange. For excmple, Mt. Gox had stopped the USD withdrawals for users and many exchanges take time to credit the money sent into your exchange and you need to verify your account in order to trade, which requires varied documents and proofs such as a passport. But you must be cautioned that while arbitrage is a nice way of making money, it is not really profitable always. A better option would be to buy a trading bot and practice arbitrage.

The biggest challenge for traders is that arbitrage needs a lot of money to make decent profits. Otherwise, it won’t really be profitable.

Conclusion:

Overall, arbitrage with trade bots is much more profitable and reliable and once you get to know your way through the markets, you will surely make a decent amount out of it.  If you liked this article follow us on twitter @themerklenews