How can I profit from Bitcoin exchange arbitrage?

Arbitrage consists of simultaneously exploiting different exchange rates in different values ​​with a single objective: to obtain a profit. Bitcoin does not have a central market like the futures market. We can buy a Bitcoin in market A and B and then sell it in market C

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Without a doubt, the cryptocurrency Bitcoin is already socially accepted. All the media report more frequently about her offering more and more details. As great as the interest is, so is the gap between Bitcoin fans and skeptics. But do not worry about this strategy as we will focus on seeing if money can be made, regardless of the direction of the move.

Definition of arbitration

Arbitrage consists of simultaneously exploiting different exchange rates in different values ​​with a single objective: to obtain a profit. Let's look at a simple example that occurs in our daily lives: at an online auction house, someone sells a particular model of computer keyboard for $ 30. We found the same model at wholesale for 12 euros. Now we have two places that we can use to conduct our arbitration: in this case the wholesale trade, where there is supply, and the online auction house, where there is demand. Without demand, the seller would certainly not offer their products there. How can we take advantage of this difference and make money? We will buy the keyboards on the wholesale market and sell them on the online auction house. Not for 30 euros, but for 29, so we are taking some customers from the other seller. The counterpart of arbitrage is speculation. If we continue with our example, as speculators, we will buy and store the keyboards, hoping that the value will increase and we will make money by selling them later at a price favorable to traders.

The arbitrage strategy

With this strategy, we will exploit the price differences in the individual Bitcoin markets. Bitcoin does not have a central market like the futures market. We can buy a Bitcoin in market A and B and then sell it in market C. There we can buy another keyboard again and we will sell it in market A. We need at least 2 different accounts in different Bitcoin markets. In both we will need money and bitcoins. The capital available will be decisive to obtain benefits. If we start with 2000 euros, the distribution could be the following:

Market A: cash and bitcoins in each for a value of 500 euros

Market B: cash and bitcoins in each for a value of 500 euros

At the moment we would not buy a complete Bitcoin since we only have 500 euros. But that won't bother us when implementing our strategy. Since we can, for example, buy and sell 0.001 Bitcoins.

Arbitrage signals

Once our accounts have capital, we can look for signals. The calculation of the difference of both prices is relatively simple:

Ask price in market A

Offer price in market B

Offer price in market A

Ask price in market B

If the difference is greater than X, then we enter. X in this case will be our expectation of profit. The higher this value, the less signals we will get and the more likely we will have fewer false trades. For example, for X, we can take $ 20 or $ 1. Which would include enough reserves for transaction fees and costs. We can also include these factors in our formula and expand it:

Arbitrage spread = Price of demand in market A - Price of supply in market B - fees - transaction costs

Suppose we can buy a Bitcoin at $ 4,400 in market A and sell it in market B for $ 4,250. The gross value of the price difference is $ 50. This value is greater than our minimum difference. Then we will buy the Bitcoin (or a part of it) in market A and in market B we will sell the same amount of bitcoins of our shares. Of the $ 50, of course, some will have been lost in fees, and so on.

Always keep your accounts in mind

The lower the capitalization of your accounts, the faster the following problem will occur: even having a lot of cash in one account, but without many bitcoins, while in the other account you have a lot of bitcoins, but without cash. As a result, we are restricted to our operations. We have to wait for Bitcoin to be much cheaper in the market where our cash is found than in the other. Only then can we operate. The alternative would be to balance the accounts. We transfer the bitcoins and the money to balance them, with which we will be dividing the risk. Attention: transaction costs are paid again.

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