Is Bitcoin Arbitrage Profitable?
Bitcoin is a cryptocurrency that seems to be growing by manifolds since last one year. The growth is spectacular given how fast its value is rising. Presently the price of one Bitcoin is around 14-15 lakh Indian Rupees. Earlier the rate of Bitcoin was quite low but it has been rising since then. The quick growth in Bitcoin price has also attracted investors who are keen in investing in this currency to earn good returns. The others are those who are buying and selling coins.
This phenomenon is known as arbitrage was a person buys the coin at a lower price and then sells it at the higher price to earn the difference between the sale price and cost price. The theory of arbitrage works where one cryptocurrency like Bitcoin is available at two exchanges on different prices. One can, therefore, buy from one exchange which is of lower price and then sell it at a higher price at the other exchange. The difference between the rates of two exchanges is the profit.
Example of Arbitrage Explained:
If one takes an example of arbitrage then it can be explained as: Suppose the Bitcoin cryptocurrency is available on two exchanges from where you can buy it. One exchange is offering the Bitcoin at $1000 and the other exchange is offering it at $990 then you can buy the coin from the second exchange at $990 and then sell it at the first exchange at $1000. The difference between the two that is $10 will be your profit.
Since the rise of Bitcoin, this method has highly been practiced which has its own advantages and disadvantages. Before we go through them we need to get to the core of how Bitcoin arbitrage works. Here it is:
How Bitcoin Arbitrage really works:
Bitcoin arbitrage is similar to that of normal arbitrage that we see in stock markets but it differentiates somewhere because Bitcoin is a volatile currency, therefore, different standards are applied here. Bitcoin exchanges like Bitcurex, Bitstamp and Bitfinex are generally used for Bitcoin arbitrage. The prices of coins on these exchanges are possibly different with some margins. One can buy the undervalued coin from one exchange than can sell it on the other exchange on overvalued price.
The principle difference between a normal arbitrage and Bitcoin arbitrage is that the value of Bitcoin is volatile and keeps on changing in a short while. So if you take sometimes in buying and selling then you may end up losing. Special care must be taken in Bitcoin arbitrage.
Understanding the reality of Bitcoin Arbitrage:
As easy as it sounds buts it’s really not an easy job to trade Bitcoins on different exchanges and then earn a good sum in return. One is going to face several problems in Bitcoin arbitrage. We will discuss few of them here that will determine whether you will be in profit or loss and overall is it worth trying?
Bitcoin is a Volatile Entity: The most important point in Bitcoin arbitrage is that the Bitcoin is a volatile cryptocurrency whose rate keeps on changing within a short duration. The volatility is quite high as one can see a difference in rates within minutes. So when you are going for Bitcoin arbitrage your biggest problem will be that small time to buy and sell your Bitcoin at two different exchanges which don’t sound that easy.
The basic problem you will face is: Suppose you buy a Bitcoin at $500 from one exchange while the rate on another was $480 on another where you had desired to sell. The time taken by you from buying and then selling is enough that the rate at selling exchange may rise to $480+ or even cross the purchasing price which can lead you to lose.
It Ain’t that Simple: Different exchanges have their different rules and regulation. First buying and then transferring that coin to another exchange and then selling it is ain’t that easy. Mostly all exchanges charge some commission while transferring, withdrawing and selling the Bitcoin. So as there is not much gap in arbitrage, therefore, you won’t get much after adding all the expenses.
Technical Issues: Some exchanges do not allow immediate transfer of coins from one exchange to another. Therefore you may not transfer your coin immediately resulting in a loss of the difference you probably would have earned. Other issues are that you may not get a seller to whom you sell your coins immediately. Due to the lower reputation of exchanges, people may not be interested in buying from those exchanges which may eventually lead you to lose.
High Exchange Rates, Taxes, and Fees:
Bitcoin exchanges are quite costly given the huge cost involved in it. You need to first pay the transfer fees from one exchange to another. The second thing comes is the fees required while you withdraw the money from the exchange. A third is the commission on Bitcoin conversion to dollars, yen or euro. The other fees can be when you withdraw money you need to pay the taxes on what profit you have made.
Given that the difference between the rates of two exchanges isn’t that much, a small marginal profit that one seems to make as a symbol ends becoming minute when one applies all kinds of taxes, fees, and commission. Lastly, the addition of risks involved and issues faced makes it more a tougher job to earn a reputed cost from Bitcoin arbitrage.
The process of buying and selling Bitcoin is time taking therefore while making instant purchase, transfer, and sale, it becomes quite tough to make a profit. The Bitcoin exchanges have limited opportunities, unlike any trading market. The exchange of coin money is a time taking a process which makes it tough to get a promising return.
What conclusion you can withdraw after reading the above article is that it is a time taking, risky and less profitable business of Bitcoin arbitrage. One on normal terms can avoid trying it as it may have negative implications, unlike normal arbitrage.