Arbitrage is the practice of taking advantage of the price difference between two or more bitcoin markets. In order to profit from the price disparity, you have to buy bitcoins on one market for immediate resale on another. This results in immediate, risk-free profit. Since bitcoin is traded on online exchanges these price differences emerge because some exchanges are more liquid than others. Bigger exchanges with more trading power will drive the price of the rest of the market. Smaller exchanges follow the price of larger ones, but with a small lag. That small lag is what makes bitcoin arbitrage possible.
Manual bitcoin arbitrage trading
Get involved in arbitrage just by having accounts on multiple exchanges with a balance in each one. When an opportunity arises, you simply buy and sell immediately without having to transfer funds between accounts. You can also buy bitcoins on one exchange and resell them on another by transferring funds (the risk in doing this, of course, is that the price might change between when you buy and when you sell as transferring and confirming funds takes some time).
Bitcoin Trading Software
You can manually check each bitcoin Exchange for a current value, or you can buy a software to help you with that. Automated trading bots will do the job of selling and buying bitcoins instead of you. These bots are simply software programs that link directly to exchanges and place buy and sell orders on your behalf automatically. They make those decisions according to a set of predefined rules and by watching the market’s price movements. You can set your own rules or take rules from some other trader. Find more about bitcoin trading software.
Bitcoin arbitrage funds
Arbitrage trading takes a lot of time and effort if you trade manually. As with any other business opportunity on the internet, for a small fee somebody else can do that for you. If you want, somebody else can do bitcoin arbitrage for you by joining bitcoin arbitrage trading fund. How does that work? In general, you deposit some amount of money into the bitcoin trading pool. The provider will then daily look for trading opportunities and try to make some profit out of price difference between two or more bitcoin markets. They will share some of the profits (or losses) with you.
We have invested in BitBays. This is an exchange website which pays a small promotional interest rate on all balances held on their site, but if you want to earn a little bit more than that you can also put your funds in an arbitrage fund that they run, which at the time of writing offers a variable rate around 10-12% APR and the option to invest using either USD, BTC or CNY.
The problem is that many so called funds were scams in the past, so you should be cautious when you are invited to invest in these kind of services. We only list funds that we have deposited money and we know they pay regularly (however, this is not a guarantee that they will do in the future).
Problems of Arbitrage Trading
Not enough opportunities – arbitrage trading depends heavily on the availability of arbitrage opportunities in the market. Sometimes there are not enough opportunities for the volume you would like to trade.
- Changing prices – sometimes the prices on different exchanges are changing, before a deal could be executed, due to the delay between selling in one place and buying in the other. By that point the arbitrage opportunity may be invalid and the trade becomes unprofitable.
- Fees – another challenge are the fees associated with each trade, that can eat away the profit margin.