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Bitcoin Arbitrage in a Nutshell 

 July 18, 2021

By  Brian Forester

The Bitcoin arbitrage phenomena originate from the cryptocurrency market volatility. When you start trading cryptocurrencies, in no time, you will see that each crypto exchange platform tends to give its own pricing to the altcoins they trade with. In this guide, you will learn what Bitcoin arbitrage exactly is and how it works.

For faster navigation, use the table of contents:

  • A quick guide to Bitcoin prices
  • Arbitraging Bitcoin (in a nutshell)
  • The difficulties of arbitraging
  • Arbitrage calculator
  • Conclusion
  • Frequently Asked Questions

A Quick Guide to Bitcoin Prices

Having an understanding of what a bitcoin price means is crucial if you want to wrap your head around bitcoin arbitraging – which is, simply put, the process of buying crypto coins at a lower price on one exchange and selling them at a higher price on another. But we will get to this a bit later. For now, let’s not rush ahead and take a closer look at how Bitcoin gets its price.

No matter what exchange platform you’re on, what you need to understand is that the price of Bitcoin (as well as any other cryptocurrency) is defined by the results of the last trade. That is why exchanges might not (and quite often they don’t) have similar prices. It is really quite difficult and unusual to find two different exchanges where BTC will cost the same amount of money. The main reason is trader activity.

The easy way to look at crypto exchanges is to see them as closed markets that have no direct relations to one another. Let’s say if a crypto exchange has low trading activity (with a low number of traders, etc.) On such exchanges, bitcoins cost less since they don’t meet massive demand. Professionally speaking, the price becomes more volatile. For that very reason, traders choose among multiple exchanges to find the one where BTC costs lower than usual to buy as much of them “for cheap.” Their next step is going to another exchange where they will sell BTC at higher prices to make profits.

And that is what arbitraging Bitcoin is about – trading coins between exchanges to make the best of the price difference. You will know more about the BTC arbitrage in the next section.

Arbitraging Bitcoin

In this section of our guide, we will try to give you a basic example of how crypto arbitrage works. To make this example, we will use two exchanges – Bitstamp and CEX.io. When creating this guide, the prices for BTC on these crypto markets were $11,561 and $11,645, respectively. As we see, the difference equals $84, making a nice arbitrage opportunity for an experienced trader to make some profit.

The strategy is simple: a trader buys 100 BTC on a Bitstamp crypto exchange to sell them quickly on CEX.io. In order to be able to take advantage of the price differences between the exchanges, a trader must make transactions in a concise time frame. It would help if you traded quickly. Otherwise, there will be no profit. With everything done right and timely, the profit will make $87 for each BTC coin.

Let’s do some math here, ok?

  • The purchased asset amount BTC ($11,561 each)
  • The cost of overall expenses is $1,156,100
  • The number of sold BTC on another crypto market is 100 ($11,645 per each)
  • Overall revenue is $1,164,500
  • Total profit is $8,400

What we must stress here is that the example above is fundamental and simplified. We used it just to give you a general idea of how crypto arbitrage works and how to take advantage of the crypto market volatility. And as you see in this example, a trader had to spend a great deal of capital to be able to make a relatively modest profit. But again, this is only a simplified example. In the real-life crypto world, things get way more complicated – traders have to deal with several difficulties that may become serious barriers. Experienced crypto traders apply intricate strategies that help them limit losses and boost profits during arbitrage trading.

Things That Can Complicate an Arbitrage Trade

Below is the list of things that can affect arbitrage opportunities and complicate arbitrage cryptocurrency trading:

  • The transaction verification process may take longer than expected, and time means much in arbitrage crypto trading. If transactions take too long, the crypto coin’s price may change.
  • When trading large amounts of BTC (and other crypto coins), traders may have to undergo more complex verification procedures – this also affects time and may diminish arbitrage opportunities.
  • Trading fees (as well as deposit fees and withdrawal fees) will take a significant portion of your profits. Learn about the crypto exchange’s fees before you buy BTC there.
  • Both crypto markets need to have high transaction volume for successful large order buying/selling operations.
  • Finally, the price may be the result of technical and/or reputational issues. Here’s what we mean by that – when Mt.Gox was two steps away from its demise, the BTC price there was meager. The reason being that traders did not trust the exchange to manage their funds. That is why traders chose other exchanges, leaving Mt.Gox with low trading activity.

Arbitrage Crypto Trading Calculator

Below, we will take a look at how you can calculate crypto arbitrage expenses, profits, and possible risks.

First of all, let’s take a look at the fees that you will have to take into account. Fees include:

  • Fiat deposit/withdrawal fees
  • Bitcoin deposit/withdrawal fees
  • Transaction fees, also known as trading fees.

By following this link, you will see our example of bitcoin arbitrage calculations that will give you an idea of how complicated crypto trading arbitrage can get and how difficult it is to make the best of arbitrage opportunities no matter what crypto market you choose.

Analyzing the arbitrage calculations

As you have seen in our calculation chart, with the overall capital of slightly over $1,000,000, our total cryptocurrency trading losses amounted to $10K. This is solid proof of how extremely hard crypto trading arbitrage may get and that, in reality, bitcoin arbitrating is way more than just buying cheap on one crypto market and selling more expensive on another.

What diminished the profit in our example is the CEX’s withdrawal fee. There is a way to reduce your fee expenses when you’re reading with larger funds. This is possible thanks to the Over-the-Counter services (OTC for short).

The main thing about arbitrage is that it gets more profitable the bigger the spread is. Spread is the price difference between your buy and sell orders. But the trick is that to make enough on selling crypto coins at higher prices, and you need to invest a large amount of capital first. And this always means taking risks.

What else you need to remember is that the traditional banking system is not too fast. Fiat deposits may take up to seven working days to process before they appear on an exchange. And that is also a problem since on crypto exchanges, the quicker you are, the more successful you are at trades. So while you’re waiting for your funds to appear in your trading account, the spread can change significantly, which eventually may make your arbitrage attempts plant worthless. That is why one of the most common strategies that traders apply is keeping a certain amount of fiat funds on their trading accounts and waiting for the right time to begin arbitrage.

But that is not all. There is another risk you should be aware of. When you have your capital on an exchange, you must mind the risks of losing your assets because of hacker attacks. You see, crypto exchanges get hacked from time to time, or they go out of business for a variety of reasons. Sadly enough, these occurrences affect trading accounts leaving unfortunate traders empty-handed.

So however convenient it is always to have a decent amount of funds on an exchange to be able to buy BTC at a lower price quickly, still, the risk of losing your assets before you even had a chance to use them is disturbingly high.

Conclusion

A quick recap on Bitcoin arbitrage

  • Bitcoin arbitrage is a practice of buying BTC (or other assets) at a lower price on one exchange and selling them on another exchange where the trading volume is higher. This process, when done right and timely, allows you to make a profit at trading crypto trading.
  • Arbitrage trading becomes possible because exchanges never have the same prices on cryptocurrencies. Each market will have its own price on BTC or any other altcoin, which depends, primarily, on trading activity within the market – the more traders participate in trades, the higher the prices are. So arbitrage traders look for the markets with lower trading activity and lower trading volume to be able to buy “cheap” altcoins and make their profit by selling them more expensive on another exchange. Thus, making money out of thin air, so to speak.
  • However, arbitrage trading is not as easy as it may seem. There are a number of nuances to be taken into account, and trading crypto coins is always a risk.

Should you try arbitrage trading?

As we already mentioned, participating in an arbitrage trade is not as easy as it may seem from basic examples. This is true that when you successfully sell cryptocurrencies at higher prices, you may make a significant profit. But you also need to take into account every time you participate in trades on crypto exchanges, and you risk your funds. Since no matter what kind of strategy you’re using, you never have full control of your funds.

Among the most common risks is the risk of losing your deposited funds because of a hacker attack or if an exchange goes out of business. There are enough stories online about trading accounts experiencing massive asset losses.

However, the goods news is that arbitrage is legal, and it is a positive practice. It is not a sort of market speculation like margin trading or other types of market manipulations. Even more, some experts believe that arbitraging may serve as a regulation to the whole cryptocurrency market. The thing is that today Bitcoin and other altcoins don’t rate the same, which is not quite right. In this matter, arbitrage cryptocurrency trading acts as a tool of market regulation. As the cryptocurrency asset market grows, more people participate in trades and perform arbitrage. Some hope that this will eventually level the cryptocurrency costs between different exchanges.

Today, taking part in arbitrage became even easier in terms of technology thanks to software like APIs that let people trade via crypto trading bots without having to sit all the time in front of the computer. With an API, people can trade on exchanges like Binance, Bitbay, Coinbase Pro, Bitmex. What an API does is linking trader accounts to the trading system, which makes for quick trades and, in some cases, allows the program of a certain trading strategy.

If you think you have enough knowledge and are confident, you may try arbitrage. The main advice we want to give you is to be careful and pay attention as you trade.

If you still have questions about Bitcoin arbitrage, please check out the FAQs section below.

FAQs

Is Bitcoin arbitrage profitable?

Yes. Cryptocurrency arbitrage trades make be highly profitable. But to be able to take part in such a trade, one must have a decent amount of money. Cryptocurrencies are very expensive, and to make significant income from arbitrating, and you will need to buy big to sell big as well.

Another thing to be aware of is the fee policy that an exchange market has. When arbitrating, fees will take a massive portion of your total revenue.

Is crypto arbitrage legit?

Yes, it is legit. Think of arbitrage just as trading – when participating in a trade, you just sell something you have previously purchased. There is nothing illegal about it as long as you do it in a country where altcoins are not banned.

What is statistical arbitrage?

Statistical arbitrage is a type of trading strategy that makes use of trading statistics in order to increase profitability while minimizing potential risks. Statistical arbitrage is deemed one of the most accurate investment techniques.

What is triangular arbitrage?

Triangular arbitrage is a process of taking advantage of an arbitrage opportunity trading between three exchanges. Examples of triangular arbitrage are not too frequent, and such trading strategy requires advanced equipment and software.

How do you make money with crypto arbitrage?

Altcoins exchanges never have similar asset pricing. This means that when you buy a cryptocurrency asset on one market, you know for sure that it will cost differently on the other. So the basic strategy behind arbitrage is quite simple: you buy an asset for a lower price, then go to another market where the price is higher and sell your asset there to make extra money.

However, there is more to arbitrage than just this simple strategy. And there are various nuances to be aware of. So experienced traders always develop their own strategies that help them increase arbitrage profitability.

Are Empirica’s crypto trading bots released as open-source?

Empirica’s crypto trading bot is a piece of software designed for Hedge funds. This bot automatically trades assets between exchanges. The trading bot is a greater tool for hedging strategies. As of today, Empirica’s bot is not an open-source software for the general public. But Empirica will provide a source code to anyone eager to help upgrade their product.

Brian Forester


Brian is an experienced journalist and crypto enthusiast. Founder of CryptoCurry - famed for his insightful input on the future of cryptocurrencies and blockchain technologies.

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