Arbitrage is the practice of taking advantages of price differences in different places, or in this case bitcoin exchanges, to make a profit.
For example, you might buy from Exchange A at $440/bitcoin, and sell on Exchange B for $480/bitcoin. The number of bitcoin arbitrage opportunities is substantial and growing by the day. Below are a few of the things you’ll need to consider in order to participate successfully in bitcoin-currency arbitrage.
Exchange rate comparisons
First, you’ll need some way of judging which exchanges are offering opportunities for bitcoin arbitrage.
There are a number of bitcoin arbitrage charts available that display all current exchange rates for bitcoin over the various exchanges. Look for two or more exchanges with wide gaps between their prices.
Accounts with the relevant exchanges
You may need to jump through a number of hoops to get an account with some of the bitcoin exchanges, so it’s worth starting the process a couple of weeks before you want to start trading.
Some will only require identity verification if you plan to trade more than a certain amount per day. Others require identity verification for all accounts.
Funding your accounts
Most bitcoin exchanges offer a number of ways to fund your account, from walking into a store and paying cash to wire transfer and third-party accounts like EgoPay. Some of these funding options won’t be immediate.
Keep in mind, too, that successful arbitrage will involve withdrawing money from the exchange with whom you made a sale, back to your bank or third-party account, and then depositing it to the exchange where you want to buy funds. This process could take you up to two weeks.
The most common way to ameliorate the effects of this two-week delay is to use smaller amounts more often and stagger deposits, buys, sales and withdrawals. That way, you’re more likely to have the funds available to take advantage of a good opportunity when you see it.
You need to know that your trading profits won’t be obliterated by the fees charged by bitcoin exchanges and any payment middle-men (eg. EgoPay). Trading fees must be calculated for every trade beforehand, to ensure that it’s worth your while. Consider using a bitcoin arbitrage calculator, as doing these calculations manually can be a pain.
Some of the fees you should check are:
Trading fees: Most, if not all, exchanges charge a percentage per transaction, usually around 0.5%.
Deposit fees: Some exchanges will charge you a fee to fund your trading account.
Withdrawal fees: Most exchanges will charge you a fee to withdraw money.
Currency conversion: If you’ve decided to trade in a currency other than your originating currency (for example you live in Singapore but trade in USD) you’ll probably be hit with currency conversion fees somewhere along the way.
These may be overt, or a less-beneficial conversion rate than is currently offered on the forex market.
Most exchanges offer free bitcoin ‘transfer’ from one place to another. This is a bit of a misnomer, really, since the bitcoins don’t actually move; the exchange is simply accessing the bitcoins on your behalf.