Arbitrage is a practice that goes all the way back to 650 BC. In this time, silver was relatively underpriced in Persia. People would get to profit from this by buying silver coins in Persia and then selling them in Greece.
It wasn’t too long before people found out how to do it with bitcoins. Bitcoin is probably the latest development in arbitrage. People are starting to find ways to take advantage of the different exchange rates on each bitcoin exchange.
The two kinds of bitcoin arbitrage
This type of arbitrage refers to the opportunity of finding a cryptocurrency exchange that sells a specific crypto for lower prices. They then sell that certain crypto on a different exchange, thus making a profit.
For example, let’s say exchange #1 sells 1 BTC for 10 ETH but on exchange #2, 10 ETH is worth 1.5 BTC. To exploit it, you can buy 10 ETH on exchange #1, transfer one’s BTC to exchange #2, and then sell the 10 ETH for 1.5 BTC. You come out with an extra 0.5 BTC by doing this.
The downside to this is that these opportunities are very rare. These are rare because it’s easy to move tokens from one exchange to another. This means that the exchange rates are corrected quickly. However, this doesn’t mean it’s impossible. The workaround to this is to find an exchange that doesn’t offer real-time withdrawal of funds. With these exchanges, the rates usually take longer to correct.
This type of arbitrage refers to the opportunity that exists when the amount of cryptocurrency that you can buy or sell for fiat is greater on one exchange than it is on another.
For example, one exchange sells 1 BTC for $4,500. On exchange #2, 1 BTC is worth $4,550. To exploit this, you can buy 1 BTC on exchange #1, transfer it to exchange #2, and then convert it again to fiat. You come out with an extra $50 by doing this. It may not be a giant price gap, but it’s still significant enough. With $50, you can buy bitcoin with PayPal or any other payment method.
Barriers that block bitcoin arbitrage
Although arbitrage opportunities sound easy on paper, there are still a lot of barriers that block them. First of all, before you even start thinking about taking advantage of these opportunities, you’ll want to familiarize yourself with how each of them works. You could lose a lot of money if you’re careless with these opportunities.
Another barrier that prevents these opportunities from becoming fruitful is time. Often times, the time that it takes to complete transactions can add up and the rates can be corrected within that time. Depending on the payment method chosen, it could take quite a bit of time for each transaction to be verified. You’ll need to find quick and easy payment methods to complete transactions quickly.
Many exchanges will also require a lot of verification in order to trade a certain amount of bitcoin. If you’re looking to complete trades with high volumes, you’ll probably need a lot more verification with the exchange before doing so. This means that you can’t join any exchange and start moving around bitcoins willy-nilly.
The fees that are implemented on these exchanges are also a factor that plays into arbitrage. These should be noted as some fees may cancel out the profit from your arbitrage opportunity.
Price differences also reflect the reputation of the exchange. For example, if a certain exchange isn’t that well trusted, that exchange will usually have lower rates. This is because people don’t trust that exchange to handle their money. Less trust = fewer buyers = lower exchange rate.
It isn’t as easy as it sounds
There are a lot of arbitrage opportunities out there, but it’s important to know that it’s a risky business. Although it’s possible to make a large profit through arbitrage, it’s important that you stay aware and careful. If you’re not careful, you could end up wasting a lot of money.
It’s a good idea to dabble a little bit in trading before getting into opportunities like this. This will help you understand the flow of trading more before you start exploiting the rates of exchanges. Even if you ARE an experienced trader, you are still susceptible to running into problems with bitcoin arbitrage.