What Is Bitcoin Arbitrage?

Arbitrage is an everyday part of investing in the stock market. So, as Bitcoin investing becomes more popular, it's only natural that arbitrage will become a consideration. Arbitrage refers to the practice of purchasing stocks in one market, while also selling it at a higher price in a different market. When done effectively, it's a low-risk way for an investor to make money quickly. But with Bitcoin, the practice can be a bit riskier, since cryptocurrency is still in its infancy when compared to more traditional investment options. It's important to know what you're getting into before you make your first purchase.

What is Bitcoin Arbitrage?
Image Credit: Alexander Baumann / EyeEm/EyeEm/GettyImages

What Is Bitcoin?

If you want to pay for something, you likely use a credit or debit card, which takes money out of your bank account. Even if you pay with cash, you have to get the cash from your bank. Bitcoin eliminates the middleman, letting one person send money to another without a financial institution in between. All transactions are logged in a centralized ledger, where the basic information is publicly available without identifying personal information on the individuals involved.

What Is Bitcoin Arbitrage?

As with traditional stocks, bitcoins can vary in value from one platform to the next, which can lead investors to consider arbitrage. Although the price is just over $6,000 at the time of publication, you'll find the actual price listed with services like Coinbase and Gemini can vary dramatically. This means you could buy Bitcoin on one marketplace, then sell it on another for a profit. Once you've created an account, this information is readily available, so you can easily see how much of a profit you will make, creating a risk-free situation, as long as you sell immediately after buying.

Is It Illegal to Arbitrage?

Arbitrage is completely legal in the U.S., whether you're buying stocks or bitcoins. Think of it as going to Walmart and buying a product that you know you can resale on eBay for a profit. Walmart gets the sale, so the immediate advantage is the profit they make when you buy the item. The only downside is that over time, Walmart may see that its product is priced under the market and choose to raise its prices, which will hurt your efforts moving forward. In general, though, arbitrage helps the economy because it keeps currency flowing.

What Is the Risk Arbitrage?

The biggest risk in arbitrage of any form is that the price will change between the time you buy and sell an asset. So, if you made a bitcoin purchase on Coinbase with the intention of selling on Coinmama, but during the time it takes your purchase to go through the price changes, you could lose money. There are also fees that are taken out both when you buy and sell bitcoins. Part of this fee is a market rate, which can vary from one day to the next, but you'll also pay to use a credit card for the transaction. Coinbase charges a base rate of 4 percent for all USD transactions, along with a conversion fee of 1.49 percent with a 15-cent minimum. The same fee is charged whether you're selling or buying. If you make a bitcoin purchase with plans to sell on a different platform, it's important to build those fees into your decision to make sure you're making the profit you think you are.

What Is an Example of Arbitrage?

Although arbitrage is primarily used in the stock market, it's far easier to think of it in terms of physical products. You may, for instance, notice that a certain book has gone out of print, but your local used bookstore has it in the clearance bin. By buying a copy, you can then sell it online at a profit. However, you'll need to take the sales tax you'll pay, the fees any online services will charge to list it and postage into consideration to ensure you protect that profit.

What Is Risk-Free Arbitrage?

The biggest risk of arbitrage is that the price will change between making a purchase and trading your bitcoins. However, you'll also need to pay close attention to the fees attached to buying and selling, as well as eventually exchanging your bitcoins for cash, to make sure you aren't breaking even or even losing money on your efforts.

references