With Bitcoin being the leader of digital currencies, growing rapidly, experiencing raids and scandals, and benefiting from an large influx of investor money, the volatility is certainly present that typically offers a great profit potential for arbitrage, which is described by Wikipedia as, “the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.”
In theory, the opportunity for Bitcoin arbitrage seems extremely lucrative. The Bitcoin market is still in its infancy. Bitcoin is very, very, very far from being a mature market. As such, the Bitcoin exchange rate will vary widely from exchange to exchange.
For instance, at the time of this writing, here are the current price quotes for one Bitcoin from three different Bitcoin exchanges:
These types of price variations are a traders dream come true and do not exist in more mature markets. However, Bitcoin being the Wild West type of market that it is, the price variations between exchanges is excessively large.
The opportunity for arbitrage seems too good to be true. One could simply buy 10 Bitcoins on BTC-e for a total of $2,564.90 and then immediately sell them at Coinbase for $2,831.10, for an instant arbitrage profit of $266.20. Simply do this 4 times per day for a cool grand. Or better yet, what if you used a Bitcoin trading robot to do this many times per hour?
The profit potential would be in the tens of thousands of dollars per day…
So why aren’t savvy traders making millions via Bitcoin arbitrage?
The answer lies in the fact that the exchanges themselves are still very immature. On Wall Street stock exchanges, trades happen in millionths of a second. On Bitcoin exchanges, trades happen in days.
Getting back to the example above of buying 10 Bitcoins at BTC-e and selling them on Coinbase, while that can be done, you will not receive your proceeeds from the sale at Coinbase for several days.
And therein lies the hurdle to successful Bitcoin arbitrage. By the time your funds are received, the Bitcoin price could – and probably will – have moved significantly away from where it was when you initiated the trade.
While some people may see the reward as being worth the risk, with the price of Bitcoin rising so rapidly, magnificent profits can be had by simply buying some Bitcoin and riding the rapid climb in value.