As someone who was mining BTCs and LTCs already some years back, I can definitely say that there is money to be made in Cryptocurrencies. Nevertheless after Investing successfully with BTC and BTC-related hardware and other stuff but then getting trapped with a lot of my Investment money (or FIAT as it is called in the cryptocurrency world) in the first major BTC-exchange hack/scam (MTGOX), really sucks. Therefore one evolves to be a more conservative Investor in terms of Cryptocurrencies. I noticed interesting developments in the Bitcoin market and think that an evaluation of Bitcoin-Arbitrage as a Trading strategy makes sense at this point. For all of you that are not 100% aware what cryptocurrencies are, see the following short definition below:
“A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency.[1] Cryptocurrencies are a subset of alternative currencies, or specifically of digital currencies.” (https://en.wikipedia.org/wiki/Cryptocurrency)
“Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of.” (http://www.investopedia.com/terms/f/fiatmoney.asp)
This post will focus on practical methods of manual arbitrage, various Bots or other solutions will not be evaluated. Also when using and searching for such Bots please be aware that a lot of Scammers and Fake Software is out there.
Basically, arbitrage opportunities in the BTC market are happening due to the mostly unregulated structure of cryptocurrencies and the various different BTC exchanges. Some exchanges which are readily used and some exchanges with a very small trading volume. Therefore, out of the mentioned facts can be concluded that it is hard to keep an efficient market system.
BTC or cryptocurrencies, in general, are very volatile products to trade or invest in. Depending on global and political circumstances (e.g. Russia anexing crimeau) BTC get a lot of buyers driven by instability. Out of such events, very rapid price movements are created at the BTC price but most probably not at the same time and on all global BTC exchanges. Due to the mentioned facts, a price gap starts to exist between BTC exchanges, these gaps are either closed very soon(by arbitrage traders) or stay there for some weeks or permanently to a certain point. See below an example of these price gaps between the exchange Kraken and Bitfinex:
The price gap between Kraken and Bitfinex are existing for some weeks already at ~100USD difference but now getting smaller.
How can these price gaps between exchanges be used to make a profit?
- Buy BTC on exchange A, transfer BTC to exchange B and sell BTC on exchange B for FIAT (preferably in the same currency – EUR or USD …)
- Buy other cryptocurrencies like LTC with your BTC on exchange A, transfer LTC to exchange B and change LTC back to BTC, then transfer either to exchange C(higher BTC price) or sell BTC for FIAT
This article will focus on the first of the two possibilities.
Limitation factors:
- Fees and costs
- Exchange Fees between currencies EUR/USD and vice versa
- Spread when changing FIAT to BTC ( basically exchange costs)
- Transferring costs between exchanges (Miners Fee)
- FIAT withdrawal fees
- Risks
- BTC price movement during arbitrage attempt
- to minimize Risks, FIAT or BTC should be ready available on the exchange and all exchange Accounts should be fully verified
- Risk of exchanges getting hacked with your FIAT or BTC on it (therefore exposure time of your assets on exchanges should not be longer as necessary and rather kept in BTC wallets or FIAT accounts)
- Profitability
- Timing is very important as it makes the most sense to get the biggest price gap as possible and close the transaction as fast as possible
- Depending on the amount of FIAT employed, it can be assumed that only bigger gaps > 75USD are profitable due to mentioned fees and costs
- Profit/ Risk factor has to be evaluated in line with the mentioned factors
How to find arbitrage opportunities?
I was able to find an easy way to find arbitrage opportunities which helps you to employ Bitcoin-Arbitrage as a Trading strategy. I will provide a step-by-step explanation in the following part:
1. Check the following website: https://bitcoincharts.com/markets/currency/EUR.html
For the EUR you can find the following comparison of BTC/ EUR exchanges, as direct investment in your country’s currency reduces fees:
You can see that the website bitcoincharts provides a very valuable comparison of BTC prices and the various mostly credible exchanges.
For our purposes, the current Bid/Ask is the most important comparison attribute. As we want to find the lowest and highest trading and most suitable BTC exchange.
The same is applicable for the USD exchanges, which can be seen in the following picture:
2. compare Bid/ Ask and find the lowest and highest trading and most suitable BTC exchange.
3. check the exchange for credibility and review via google
4. Sign-up and verify yourself on the exchanges
5. create profit from Bitcoin-Arbitrage as a Trading strategy!
Testrun by Investinstuff
I started two test runs with different scenarios:
- First test run with ~750EUR from an EUR exchange (bitcoin.de) to a US-exchange (Bitfinex).com and then change my BTC in USD –> pretty unfavorable setup in terms of fees and costs
- The second test run ~3000EUR is done with two EUR exchanges (BTC-e and Bitcoin.de) – this second setup is in my case as a European the best possible and economic setup
I will provide the results of this arbitrage testruns in one of the next posts, so stay tuned!
Suggested BTC exchanges:
As I made very good experiences with the following exchanges in the last years I can suggest them to anyone of you:
Bitcoin.de
https://btc-e.com (take care see following posts part #2)
Sources/ Links:
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