How to Trade with Bitcoin Arbitrage
Bitcoin trading has become very popular in 2018, with many people keen to get a piece of the 1500% gains seen over 2017 in Bitcoin. Some after seeing losses in corrections have turned to alternative ways to trade, such as arbitrage.
This guide will explain what arbitrage is, how to find arbitrage opportunities for Bitcoin, and how to actually do this kind of trading (both manually and using bots).
What is Arbitrage?
When you first trade Bitcoin, you'd likely use a single exchange to buy and sell your Bitcoin. Something you may not be aware of is that the price of Bitcoin varies on each exchange depending on how many users are buying/selling at that point in time (lots of buying pushes the price up, lots of selling pushes the price down). This means that at one point in time the price will be different on every exchange, sometimes by as much as 4 or 5%. This is where arbitrage comes into play. It refers to the process of buying on an exchange where Bitcoin is cheap, and then selling on an exchange where it's more expensive - allowing for an immediate profit.
There are several ways to do arbitrage trading on Bitcoin:
- Buy Bitcoin on an exchange, transfer it to another exchange and sell it, then transfer it back to the original exchange and repeat.
- Store half your money on two exchanges and buy/sell at the same time (this is sometimes considered higher risk as you need to keep half your money in Bitcoin at any one time, a 'short' trade can sometimes be used to minimise risk - see this guide for more info).
So in short, arbitrage trading is where you profit from the variation in Bitcoin price between exchanges. As we write this for example Bitcoin is selling for $8,415 on CEX and $8,215 on Kraken, a difference of 2.4%.
How to find Bitcoin Arbitrage opportunities?
In theory it's fairly easy to find opportunities for arbitrage, where just like above you find two exchanges where the price of Bitcoin varies by a few percent, but in practice it can be difficult.
Firstly, to find which exchanges have price differences, you can either look through sites like CoinMarketCap and compare Bitcoin's price, or you can use paid services like Coinigy's ArbMatrix which do this comparison for you (this is an affiliate link).
But once you know where arbitrage opportunities are, you need to be aware of a number of things:
- Most exchanges charge a fee to buy/sell/withdraw, make sure you take this into account. Be especially careful of fees when moving crypto between exchanges; these fees are often fixed, where you have to transfer large amounts for trades to be profitable.
- Time matters in arbitrage, so make a test deposit/withdrawal before making the main trade to make sure your money moves fast enough. Fiat in particular can take days if not weeks to withdraw.
- Be aware that many smaller exchanges can have significant price differences between larger ones, in the range of 20% or more. Although sometimes these can be used for arbitrage, they're often due to a lack of liquidity - where you can't buy/sell a large enough quantity for the trade to be worthwhile. Sometimes this can be very extreme where small exchanges have completely seperate economies for smaller coins than larger exchanges.
- If a significant arbitrage opportunity exists on a small exchange, load time/performance can become an issue. Both the extra load from traders like yourself and DDoS attacks can lead to problems selling and withdrawing.
- If you plan to create a bot for arbitrage trading, test APIs beforehand. Until a recent upgrade, Kraken for example has had bad API performance, so arbitrage trading via it would have been very difficult if not impossible.
- Be aware that you may have to declare each trade when submitting your taxes (especially if you're doing it with large amounts or very frequently). We're working on a Crypto Coin Tracker to help with this issue.
In general, if you see an artbitrage opportunity of 3% or more, be very skeptical. It's likely due to one of the above factors, where the reason the opportunity exists is because it's very difficult to actually take advantage of it. There are countless bots active 24 hours a day just trading via arbitrage; you have to compete with these bots as well as other traders like yourself. There are opportunities, but you may have to spend a while finding them!
Best Bitcoin Arbitrage Bots?
There are a number of free and paid bots you can use for arbitrage trading. See this post by The Merkle for a list of them. Regardless of what bot you choose, look into how it works. If you need to send a 3rd party your exchange API keys you should be very skeptical, as they can be used maliciously to make bad trades and cost you money. Giving an API key withdrawal access is even more dangerous - you shouldn't never really give this to a 3rd party, only do this for a bot running on your personal computer/server (and even then only if you really have to, if someone gets that, they can potentially take all your money).
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November 11th, 2018
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