At the beginning of 2017 (January 9th), the price of Bitcoin was 43% less in the U.S than it was in South Korea. If you had a way of noticing this and taking advantage of the price difference, you would have made a 43% gain on your trade just by using bitcoin arbitrage trading. For instance, if you had spent $100k on the trade, your profit would have been a gross of $43k. That’s the whole idea behind arbitrage – buying digital assets on an exchange that is selling them inexpensively and selling them for a profit to another exchange that has a higher price.
But this is easier in principle than in practice. It is not easy to buy from one exchange and sell on another almost simultaneously. The fees and delays in the transactions play a huge role in determining the success or lack therefore of a strategy. As long as you factor all the costs involved in order to project how much profit you need to be making, bitcoin arbitrage can be an easy way to make a quick buck without necessarily exposing yourself to too much risk.
Like most of the other strategies, arbitrage is all about buying low and selling high. However, the main difference is that you will be buying low on one exchange and selling high on another exchange. Arbitrage is one of the oldest trading strategies. Experts believe that it can be traced back to medieval times when people would buy silver coins in Persia and then sell them for a handsome profit in Greece where silver coins were much more expensive. Modern technology has however made the strategy more sophisticated and it is now easy for anyone to take advantage of technological advancements ot implement bitcoin arbitrage strategies across a number of exchanges.
Bitcoin arbitrage opportunities
Cryptocurrency is a hugely volatile market and as such, it is rife with bitcoin arbitrage trading opportunities. There are largely two types of bitcoin arbitrage opportunities on the crypto market;
- Crypto/crypto arbitrage
If you find an opportunity where you can buy 1 BTC for 11 ETH on one exchange and then sell 1BTC for 11.5 ETH on another exchange, it would be described as a crypto/crypto arbitrage opportunity. In this example, the trader will gain 0.5 ETH as their profit.
A Crypto/fiat arbitrage opportunity is when you find an exchange that you can buy a certain cryptocurrency and then sell it for a greater price on another exchange. Such opportunities happen quite often in the cryptocurrency market.
The biggest challenge to exploiting arbitrage opportunities is the time it often takes to move fit on an off an exchange. For instance, it takes anything from 1-3 days to move fiat onto n exchange. The best way to counter this is to deposit funds across the multiple exchanges you wish to trade on and then just wait to execute the trades once the conditions are right. If you combine this approach with a well-thought-out algorithm, you will make lots of profits without much risk.