There are a lot of ways to gain profits from bitcoin and other cryptocurrencies today. One of the most popular means is crypto trading where customers can trade their bitcoin and other cryptocurrencies for assets such as fiat money or other virtual currencies.
On exchanges where tradings are done, the price of bitcoins and other cryptocurrencies vary from one platform to another. There was a time when the price of bitcoin was 43 percent higher in South Korea than it was in the United States, which happened on January 9, 2018.
This paved the way for some users to buy bitcoins on markets or exchanges where it is sold at a lower price and immediately sell it in South Korea, making an instant profit through price discrepancy.
This instance is called bitcoin arbitrage, which is an approach that is widely used in the crypto world. To further understand what it is and how it works, let us define first what bitcoin arbitrage is.
Bitcoin arbitrage in a nutshell
Arbitrage is buying something in one place and then immediately selling at a higher price in another place. You can do arbitrage in almost anything as long as there is an available market ready to buy.
Bitcoin arbitrage, on the other hand, is an approach where you buy and sell bitcoin to gain profits through the price differences in various exchange platforms. Simply, it is buying bitcoin in an exchange where it is sold at a lower price and then selling it on another platform where the price is higher.
Bitcoin arbitrage is among the popular ways of making money with bitcoins. While bitcoin arbitrage may sound easy to do, there are a lot of things for you to explore and consider. The very first thing you need for doing bitcoin arbitrage is the asset or money that you will use for buying.
When you already have the funds that you need, you can now start searching for different bitcoin exchanges and marketplaces. There are over thousands of available bitcoin exchange platforms today and this means that there will be more opportunities for arbitrage, notably when you try scouting for opportunities not only in the top exchanges but also in other platforms.
Cryptocurrency arbitrage methods
There are three types of arbitrage in cryptocurrency namely spatial, cross-border, and statistical. To briefly explain each, spatial arbitrage is gaining profit from the price difference of bitcoin or any cryptocurrency quoted on two different exchange platforms.
The second type, cross-border arbitrage, is almost the same as spatial. The only difference is that the exchanges used for transactions are located in different countries. This method can be difficult due to some requirements and regulations issued by some countries regarding cryptocurrencies such as Know Your Customer (KYC) among others.
The last method is statistical arbitrage, which uses mathematical modeling in identifying arbitrage opportunities. Understanding the math behind it may seem overwhelming because it is known to be deeply quantitative in nature and uses an analytical approach to trading.
Challenges in doing bitcoin arbitrage
Doing arbitrage is thrilling and interesting. However, you also have to remember that the very asset that you are using is highly volatile. Bitcoin’s price swings constantly in an unpredictable manner. It might be extremely high today and severely low tomorrow, or it can be the other way around.
Getting yourself familiar with the bitcoin market and reading the market signals will be helpful in making predictions about bitcoin’s price from time to time. There are charts that can be used to see and compare bitcoin’s price in various exchanges.
Buying, selling, or transferring bitcoins from one exchange to another will require you some charges. This may include transaction, network transfer, and wallet fees. While constantly reviewing these things before doing arbitrage may be tedious at first, estimating these amounts prior to buying and selling will help you identify the exact amount of profit you will gain and if buying or selling on a particular platform will be worth it. Doing this will also give you an idea of whether you are making money or you are losing it.
Bitcoin arbitrage is considered less risky as compared with bitcoin day trading. However, it can still be deemed as a risky business due to frauds and scams that arise. There are instances where some arbitrage sites will mention the benefits of arbitraging without stating the drawbacks of charges and the possibility of transaction delays.
Is bitcoin arbitrage legal?
This is one of the frequently asked questions about the process, and to answer it—yes, it is completely legal. Since the process involves just buying bitcoins at a lower price from an exchange and immediately selling it in another where the price is higher, it is not violating any financial regulation or rule. An article published by Medium even listed some countries where it is ideal to do bitcoin arbitrage. These countries include South Africa, Brazil, India, Colombia, and Malaysia.
Is it worth a try?
Bitcoin arbitrage, just like any other way of making money with bitcoin, requires thorough digging and familiarization. While it may sound easy to do, it can also get complicated because of some processes and regulation issues.
Know which platforms work effectively for you and monitor the price differences on each.
Take advantage of the process by exploring and familiarizing yourself. This can lead to more possibilities of arbitrage opportunities.