On January 9 of this year, the price of Bitcoin in South Korea was43% higher than it was in the U.S.
If youd had a way of buying $100k USD of BTC on SFOX and selling it on Bithumb without any fees, foreign currency exchange rates, or time delays, you could have pocketed $43k. Thats the financial tactic ofarbitrage: the practice of buying an asset and immediately selling it at a higher price for a very low-risk profit.
But of course, its not that easy to buy BTC on oneexchangeand then transfer and sell it on a different exchange without any fees or time delays. When you factor in all of the time and fees involved, how much can you really profit off of arbitrage opportunities? And how frequent are these opportunities in the first place?
Heres the short answer:Bitcoin arbitrageispossible, but its not a long-term sustainable strategy.
When it comes to arbitrage, Bitcoin is just the latest stage for a financial strategy thats played out for literally thousands of years.
If the same thing has a different price in two different places, you can profit by buying it at the cheaper place and selling it at the more expensive place. Thats what arbitrage is. Even way back in 650 BCE, when silver was relatively underpriced in Persia, people would profit through arbitrage bybuying silver coins in Persia and selling them in Greece.
This is the exact same kind of practice people have in mind when they talk about arbitrage opportunities in Bitcoin.
For instance: November 28 of last year was momentous because BTC passed the $10k price marker but not on all exchanges. While CEX was listing BTC at $10,026, Kraken was listing it at $9,748. If you had a way of (1) getting fiat from your bank account onto Kraken, (2) buying BTC with that fiat on Kraken, (3) transferring that BTC to CEX, (4) selling that BTC on CEX, and (5) getting that fiat from CEX back into your bank account all instantly and without fees then you could have made a return of over 2.8% right away with very little risk.
Cryptocurrency gets a lot of well-deserved attention for its insanevolatility, which carries a lot of risk for huge gainsorhuge losses. In that sea of risk, arbitrage is one tactic that seems fairly low-risk though well see that it isnt as low-risk as some make it out to be.
Before we dive into the practical matter ofhowto capitalize on arbitrage when it comes to Bitcoin, we need to get the lay of the land in terms of what kinds of potential crypto arbitrage exist. At the highest level, there are two kinds to consider:crypto/crypto arbitrage, andcrypto/fiat arbitrage.
Lets look at what these two types of arbitrage is, how hard each is to capitalize on, and how you might be able to exploit them.
This kind of arbitrage opportunity exists when the amount of one cryptocurrency for which you can buy or sell a different cryptocurrency is greater on one exchange than it is on another exchange.
For example, suppose you can buy 1 BTC for 10ETHon Exchange 1, and you can sell 1 BTC for 10.5 ETH on Exchange 2. This is a crypto/crypto arbitrage opportunity. To try to exploit it, one could buy 1 BTC for 10 ETH on Exchange 1, transfer ones BTC to Exchange 2, and sell ones BTC on Exchange 2 for 10.5 ETH, pocketing 0.5 ETH as a result of arbitrage (ignoring fees for simplicitys sake).
These opportunities are rare because its relatively easy to move cryptocurrencies from one exchange to another, meaning that differences in crypto/crypto rates across exchanges are corrected relatively quickly. Buton exchanges that dont offer real-time withdrawals of funds, these differences arent so easily corrected meaning that youcanstill find such arbitrage opportunities there.
This kind of arbitrage opportunity exists when the amount of cryptocurrency you can buy or sell forfiatis greater on one exchange than it is on another exchange.
For example, if theres a difference of $50 in the price of BTC in USD on two exchanges, theres a crypto/fiat arbitrage opportunity. That might not be the giant price gap that we saw internationally on January 9, but its still significant.
Opportunities like this are more common than you might expect.We track them on Twitterso you can see for yourself:
The main impediment to exploiting crypto/fiat arbitrage is the amount of time and fees it can take to move your fiat on and off of exchanges. If youre trading on exchanges within your own country, it can take 13 days to move fiat onto an exchange and another 13 days to move it off of an exchange. If youre trading on international exchanges, it can take longer to move fiat into and out of international banks and if youre trading with foreign currency, you need to account for foreign exchange rates, too. All of this can eat into your arb spread pretty quickly.
For example: suppose that Bitcoin costs 0.40% more on a Korean exchange than it does on a U.S. exchange, once you account for the KRW/USD exchange rate. Lets imagine that you try to profit off of this arbitrage opportunity:
You wire $100,000 USD to the US exchange for a $100 wire fee.
You buy BTC on the US exchange for a $100 network fee and $50 in trading fees.
You transfer your BTC from the U.S. exchange to the Korean exchange for another $100 network fee and a $50 withdrawal fee.
You sell your BTC for KRW on the Korean exchange for a $100-equivalent network fee and $50 in trading fees.
You exchange KRW for USD and wire it back to your bank account for a $50 withdrawal fee, a $100 wire fee, and a $100 fee from the foreign exchange rate.
Just through fees alone, you lost 0.80% of your investment twice the initial difference between the BTC price on the two exchanges! And that could have been a dramatically greater loss if BTCs price had decreased after you bought it on the U.S. exchange, which is certainly possible, given the fact thatthe cryptocurrencys price frequently moves multiple percentage points in a single minute.
How common are large, quick swings in BTCs price? From March through May of 2018, there were over 10 cases in which BTCs price swung ~410% in a single minute. (All times are in PST.)
In that hypothetical scenario, your arbitrage opportunity would have you spending a lot of time and energy just to break even! And thats not atypical:The fees and time associated with arbitrage can easily cost you at least 40 basis points.So if youaregoing after a fiat/crypto arbitrage opportunity, it had better be large enough to offset those costs.
Youve probably noticed by now that there are a lot of fees and time delays standing between you and Bitcoin arbitrage opportunities. Theres a lesson there:Its wrong to call arbitrage riskless profit.Given the volatility of the market and the time required for transfers, the arbitrage opportunity could vanish or even reverse direction by the time your money is in a position to exploit it.
With that said, there are a couple of strategies that could help you jump on arbitrage opportunities when they do arise: Its a matter of (1) being prepared and (2) knowing where to look.
One way to minimize the impact of time delays on arbitrage trading is to simply put oneself in a position to act as quickly as possible on any opportunities that arise. If you kept a combination of BTC and fiat on multiple exchanges, you could theoretically capture arbitrage opportunities between those exchanges without waiting for transfers between your bank account and those exchanges.
For example, suppose you make it part of your strategy to keep 1 BTC and $10k USD on Bitfinex, and another 1 BTC and $10k USD on Bitstamp. When you noticed a Bitcoin arbitrage opportunity between Bitfinex and Bitstamp, you could then immediately exploit it by buying BTC on the exchange with the lower BTC price (using the fiat you already have on that exchange) and selling that same amount of BTC on the exchange with the higher BTC price.
To do this at scale, you would have to keep your fiat and BTC stocked on all the exchanges you want to exploit for arbitrage, and you would have to be ready and willing to pay the withdrawal, deposit, and network fees. It could, however, allow you to jump on arbitrage opportunities quickly without needing to wait for your money transfers to clear and hoping the opportunity doesnt vanish in the meanwhile.
If youre just looking at the top of exchanges order books, youll definitely find some arbitrage opportunities. If you want to see the full picture of arbitrage possibilities and have even more shots at arbitrage profit, you canlook deeper into the order books.
For example, suppose that youre looking to buy BTC and see that the price at the top of the order book is $6,600 USD however, there are only very small (~0.2 BTC) quantities up until the price of $6,550 USD. In this case, there could be an arbitrage opportunity between exchanges if you are willing to wait, buy as soon as the price hits $6,550 on an exchange, and then immediately sell that amount of BTC on another exchanges order book.
If youre using SFOX to connect to multiple exchanges at once, you could take advantage of the above opportunity by usingthe Tortoise algorithmorHare algorithmto set your limit buy order at $6,550 USD and get the best price possible across multiple exchanges. Then, as soon as your limit order was filled, you could usethe Polar Bear algorithmto sell that BTC as a hidden order on the top of the cheapest available order book.
Because SFOX connects to multiple exchanges and liquidity providers, our order book doesnt have a spread; instead, it has an arb, for arbitrage opportunity. That arb wont always be enough to cover trading fees, but it will always save you money on your overall BTC trade.
This kind of deep-order-book trading could net you an arbitrage profit but you wouldnt have seen the opportunity if you were looking only at the top of order books.
Bitcoin arbitrage can often seem easier than it is because its easy to overlook the fees and time it takes to actually capitalize on arbitrage opportunities. Once you have those costs in mind, its a lot harder to profit off of pure arbitrage though, as weve seen, its not impossible.
All things considered, while Bitcoin arbitrage is a useful tool for a trader to understand, there might be easier ways to profit from crypto likeday tradingor simplyHODLing.
Why Bitcoin Arbitrage Happens, and Where You Can Find It
If you want to master the strategy of arbitrage in crypto, you need to know where to look and why.
The roller-coaster nature of cryptos prices makes them a great day trading targetif you know what youre doing.
The above references an opinion and is for informational purposes only. It is not intended as and does not constitute investment advice, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any cryptocurrency, security, product, service or investment. Seek a duly licensed professional for investment advice. The information provided here or in any communication containing a link to this site is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject SFOX, Inc. or its affiliates to any registration requirement within such jurisdiction or country. Neither the information, nor any opinion contained in this site constitutes a solicitation or offer by SFOX, Inc. or its affiliates to buy or sell any cryptocurrencies, securities, futures, options or other financial instruments or provide any investment advice or service.
The advanced Bitcoin trading platform for advanced Bitcoin traders. Our algorithms ❤ volatility. Backed by @YCombinator.
Crypto analysis from SFOX, the primier crypto trading venue.
Welcome to a place where words matter. OnWatch
Follow all the topics you care about, and well deliver the best stories for you to your homepage and inbox.Explore
Get unlimited access to the best stories onUpgrade