Bitcoin is a volatile digital currency increasingly used as an alternative to fiat currency for day-to-day online transactions. However, the unpredictable price movements make Bitcoin an exciting trading instrument. In either case, Bitcoin presents incredibly profitable opportunities for investors and traders alike. Bitcoin arbitrage is among those numerous possibilities that allow users to benefit from the less efficient crypto market.
In the financial markets, leveraging from price differences of an asset between two marketplaces is termed arbitraging. In the context of Bitcoin, an arbitrage involves buying and selling the asset at lower and higher prices from different crypto exchanges, respectively. By the end of this post, you will learn about arbitrage in Bitcoin, useful tips, the legality of the phenomenon, and chances of making profits.
How does Bitcoin Arbitrage work?
The largest market cap and highest valuation are reasons why Bitcoin is the most preferred cryptocurrency for arbitrage. The whole notion of Bitcoin arbitrage is how quickly one can place a trade, depending on the rapid price fluctuation across multiple crypto exchanges. The frequency of Bitcoin trading at these exchanges is the determinant of the asset price and the prime cause of price variation.
The trading volume is generally higher at big exchanges, so the price of Bitcoin is usually higher there. Small marketplaces, on the other hand, offer a lower Bitcoin price due to fewer trading activities. But a theoretical arbitrage in Bitcoin is created by the purpose of small exchanges to match the price at major crypto exchanges.
Since the price gaps are small more often and can widen or narrow in no time, traders need to be vigilant of the crypto market and ready with requisite funds to profit from arbitrage Bitcoin. Those who actively arbitrage in Bitcoin are known as arbitrageurs.
Although there are various ways to arbitrage Bitcoin, traders can choose from the three most popular forms of arbitraging – Simple, Triangular, and Statistical.
- Simple Arbitrage: Briefly, it is buying Bitcoins with one exchange at a lower asking price and selling those with another crypto exchange at a higher bid price. The discrepancy of the price offered by these marketplaces results in a net profit. It is a convenient arbitrage Bitcoin practice, provided the trader owns enough funds or resources and has it stored in digital wallets.
- Triangular Arbitrage: Unlike the previous method, triangular arbitrage Bitcoin requires trading three different cryptos at one or multiple exchanges and benefits from the price differences between these cryptocurrencies. The individual crypto exchange pricing for virtual currencies enables arbitrageurs to generate significant profits. However, using only one exchange to execute the strategy can result in no transaction fees.
- Statistical Arbitrage: Many crypto exchanges integrate arbitrage bots to facilitate the buying and selling Bitcoins within or between different marketplaces. These bots run on quantitative algorithms and rely on mathematical models to analyze crypto price trends. As all this takes place in real-time, bots identify the potential arbitrage opportunities in Bitcoin and execute the trade simultaneously.
Before moving with your arbitrage in Bitcoin decision, here are a few things that you must consider.
- Each Bitcoin transaction has a fee attached to it that might range from 0 to 0.5%, depending on the amount traded, which means you would end up with lesser profit than expected.
- Price fluctuations remain sharp across exchanges that could affect the potential earnings.
- Trades and quotes must be in real-time to make the most out of arbitrage.
Bitcoin Arbitrage Tips
Arbitraging could be lucrative only when done smartly. Below are the tips for a successful arbitrage.
- Use exchanges that are trusted and regulated.
- Check your Bitcoin balance in the wallet and order volume on these exchanges.
- Set alerts to get notified about arbitrage.
- Identify the perfect arbitrage opportunity.
- Choose an arbitrage with minimum processing time.
- Save the arbitrage before the price changes.
1. Is Bitcoin Arbitrage Legal?
Yes. Bitcoin arbitrage is a legal trading strategy as long as the crypto does not circumvent local laws of the jurisdiction. Know that most countries ban Bitcoin trading. Arbitrage is a common and widely accepted strategy in the financial markets, for it lets traders move their assets from one marketplace to another. Also, it makes the cryptocurrency market more efficient and brings stability to the digital asset’s price.
2. Is Bitcoin Arbitrage Profitable?
Indeed, the concept of Bitcoin arbitrage is based on the logic of turning the price disparities into substantial profits. With that said, it all depends on the trader’s activity, the strategy applied, and the arbitration software used. It is all about being proactive with market analysis and jumping in when the price gap seems favorable.