Bitcoin arbitraj

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The Beginner’s Guide to Bitcoin Arbitrage

By: Ofir Beigel | Last updated: 5/4/20

The fact that each Bitcoin 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.

Bitcoin Arbitrage Summary

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.

That’s Bitcoin arbitrage in a nutshell. 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

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 $11,561 while the price of Bitcoin on CEX.io is $11,645.

The difference between prices is $84, and this is quite a decent opportunity for arbitraging. Let’s 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.

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In a perfect world you’d make $87 per Bitcoin.

Let’s get down to the math:

Number of Bitcoins bought in Bitstamp – 100

Price of each Bitcoin – $11,561

Total expenses – $11,561 * 100 – $1,156,100

Number of Bitcoins sold on CEX.io – 100

Price of each Bitcoin – $11,645

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.

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 amount 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 you know what you 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, my “real world” profit comes to about a $10K loss, while I’ll 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 that’s 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 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 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 you’re putting your money at risk, as exchanges getting hacked or going out of business is unfortunately still common these days.

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. Frequently Asked Questions

Is Arbitrage Illegal?

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.

6. Conclusion – Should you try to Arbitrage?

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 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.

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.

If you’ve had any experience with Bitcoin arbitrage I’d love to hear about it in the comment section below.

BTC Trader: Bitcoin Arbitrage Made Easy

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Arbitrage serves an important function in the Bitcoin economy. Thanks to the individuals and automated bots that actively look for price differences between the various Bitcoin exchanges and buy from one and sell to another if the price disparity ever becomes high enough for the transaction to be worth it, people who are buying or selling BTC for their own use can rest assured that they are paying roughly the same price no matter which exchange they go to. Arbitrage also promotes competition among exchanges; if the only people trading on exchanges were those who were actually seeking to convert their money from one currency to the other, there would not be enough volume on the smaller exchange to sustain them, and it would be very difficult for new entrants to gather up enough momentum to survive.

In an effort to make life easier for traders participating in Bitcoin arbitrage, developer Eun-Joo Hansch Seoung and her husband have developed a Bitcoin client designed specifically for the task. The idea is simple; rather than having to navigate between browser tabs and spend time copying and pasting codes and addresses across multiple websites and interfaces, almost all of the process can be done within one client which handles all of the operations automatically. The software was originally developed in late 2020 to early 2020 for the now defunct Bitcoin exchange TradeHill, but by the time the software was finished the exchange had already shut down. Hansch writes, “I really was very disappointed since I had been working for months to create a software, which was of no use any more! But I decided not to give up! I figured out the API of MtGox and reused large parts of my GUI. And now BTC-Trader is capable of using the MtGox API.” In fact, BTC Trader supports much more than MtGox; it also includes support for the BitInstant API, a BitcoinCharts overview and the ability to see market prices for all exchange for a specific currency – a view which is surprisingly missing from BitcoinCharts. If you are working in multiple currencies, BTC Trader offers a view which is missing from MtGox: the ability to see all of your balances in all of your different currencies at the same time.

As an example of what can be done, Hansch offers a video tutorial showing how the software can be used to sell 2 BTC for USD on MtGox, send those USD to BTC-E via BitInstant, and sell them back for 2.0037 BTC on BTC-E all in the space of 50 seconds.

The basic steps are simple; as Hansch writes:

  1. Sell Bitcoins on MtGox site to get USD funds.
  2. Use the USD funds on MtGox for creation of a MtGox coupon code.
  3. Creation of a Bitinstant quote with a mouse click.
  4. Execution of a Bitinstant transfer to BTC-e Bitcoin exchange.
  5. Checking the Bitinstant API response for retrieval of funds.
  6. Purchasing Bitcoins on BTC-e exchange.

With BTC-Trader you can perform step 2 to step 6 in about one minute.

The program still has shortcomings; particularly, support for exchanges other than MtGox is not fully integrated into the program, so the last step of the process of arbitrage between MtGox and BTC-E, for example, does require going directly to the BTC-E website. According to Hansch, developing support for additional exchanges will take a considerable amount of time. “The development of a BTC-e version may not take another year,” Hansch writes, “but there is still a lot of work to do.” Given the rate at which new ways of exchanging Bitcoin are appearing, BTC Trader may never be finished. However, Hansch believes that the product is ready to see the light, and is eagerly looking forward to hearing from its first new users.

Eun-Joo’s husband, Andreas, has also agreed to answer our questions about his role in the development of BTC Trader in an interview:

How did you first hear about Bitcoin? What got you interested in helping to develop a trading application for it?

I heard about Bitcoin in September 2020. On the 24th of September 2020 I registered at MtGox. At first I only traded a few Bitcoins using about 200 Euro from my bank account. But after a few months I created enough profit to be independent. I promised to my wife, that I will not use more than 200 Euros. But my profit exceeded 200 Euros and I told her: Look, this money I created from nothing. I gave all the money back to our bank account, so this Bitcoin money is truly mine and I can do whatever I want to with it. I reinvested my Bitcoins and did a lot of trading. One day I had been lucky and earned about 30 BTC due to an error of a website. I tried to contact the support but didn’t get a reply, so I kept the Bitcoins. At that time this event nearly doubled my funds. Since then I developed my BTC-Trader and did a lot of trading.

Many are suspicious of a claim that in the modern age of nearly instant high-frequency trading human-controlled arbitrage can stand a chance against bots. Do you think human trading using your program can still be viable?

Although many people are using trading bots you can still make some profit, because a human being will always be better in his analytical abilities than a trading bot, which may be faster. I see often trading bots just making a little cheaper offer, if you go down with the price. Sometimes you can chase them down to a lower price just by making very small sell offers. However if this trading bot is more intelligent, it knows that this offers better in price are just too small. So you can also figure out the behavior of a trading bot and try to trick it. For example you use a 1 BTC ask to get the bots price down. But the rest of your BTC you will sell for a higher price. The bots Bitcoins will sell faster if you managed it to get him sell his Bitcoins cheaper. But in many cases you can just trust on the market. Just sell your BTC for a high price and get some profit. This small bots will sell all their Bitcoins and the price will still go up. There is just a little patience needed.

Have you managed to use the software to make any trading profits yourself?

My main strategy is the transfer of funds via Bitinstant from MtGox to BTC-e. At this Bitcoin price the difference should exceed about 0.25 USD. If so you can sell Bitcoins on MtGox, transfer the USD funds to BTC-e and buy some more Bitcoins back. With 100 BTC you can gain about 1-2 BTC per day in doing so. The most important thing is to be quick enough. While transfering the funds you are taking a risk. Selling BTC on MtGox and transferring the USD funds to BTC-e via Bitinstant takes some time. During this time other users can buy this cheap ask on BTC-e and you end up with USD and a too high price for buying back BTC. Now you have to decide if the BTC price will go up further or not. Sometimes you will do the wrong decisions. But you should keep cool then and try to keep the losses as small as possible. The shorter the time you will have to take this risk, the better. With BTC-Trader I am quicker than the user, who will try to do this process manually. This is an advantage.

What is your main concern with getting BTC trader finally out there for anyone to try?

It is not easy to convince users, that they should use BTC-Trader. I guess most Bitcoin users are very good at computers. Many use Linux as operating system. They only trust open source software or software they created on their own. A proprietary software for trading on MtGox faces the difficulty, that nobody will trust such kind of software. Sometimes I think it might be impossible to get money for a software users wouldn’t try even if it was for free. Today I was kind of excited about the first download of BTC-Trader. But I don’t know if this user will try it. However I will know if he will request a license.

Arbitraj: Cryptocurrency Price Arbitrage Opportunities App?

Arbitraj is the simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies and would therefore not exist if all markets were perfectly efficient.

As a result of the volatility of the current cryptocurrency market, differences between different exchanges can be heavily exploited. These inefficiencies should be taken advantage of to make profits and Arbitraj.io is helping its users in doing exactly that.

What Is Arbitraj?

Arbitraj.io is building a real-time, digital currency price comparison platform which takes advantage of the price difference between two exchanges. Their platform pulls prices from more than 60 exchanges around the worlds highlighting the best arbitrage opportunities at any given point in time.

It is to be noted that the exchanges an investor trades in is as important as the coins they trade and Arbitraj.io gives investors the opportunity to do just that. When you search for a coin, their algorithm sorts the exchanges by the savings offered by those particular exchanges. Higher the savings, higher the results of the listings.

Users have the option to share these results on their favorite social networks which include LinkedIn, Facebook and Twitter so that your friends and peer can enjoy the same benefits as you.

Their user interface is minimal and intuitive so it is beginner friendly as well as it does the job for professional traders. They are on the process of making a mobile app so users can use the platform on the go.

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