How Does Bitcoin Arbitrage Work?
There is a lot of hype right now about Bitcoin arbitrage. Gurus and pontificators all want you to believe that you can buy Bitcoin on one exchange for a low price and sell it on another for a higher price, making an instant and easy profit.
This is called Bitcoin exchange arbitrage. And with any type of business or investing venture, it’s really not quite that easy.
The challenge with any kind of arbitrage (and there are many types) is that you have to understand exactly what your risks and obstacles might be before you attempt it. That way you go in with your eyes wide open.
Bitcoin does have quite a few different obstacles to be aware of before you begin the arbitrage process.
How Bitcoin Arbitrage Works
There are many types of arbitrage. It simply means buying in one place and then quickly selling in another place for a higher price. For example, if you buy an item in the clearance section of a department store for $10 and then sell it on eBay for $20 – that’s arbitrage.
You can arbitrage nearly anything where there is a market that is willing to buy. Your imagination and willingness to find the deals are really the only limit.
Bitcoin arbitrage is a little more complicated than the eBay model I shared above because it comes with its own set of constraints. But it still follows this basic methodology to buy lower and sell higher as quickly as possible.
How to do Bitcoin Arbitrage
The basic idea is simple. You look at the different Bitcoin exchange markets and find differences in prices between what one market is selling for and what one market is buying for. At that point, you pay for Bitcoins in the first exchange with dollars or whatever other currency you use and then withdraw the Bitcoins.
After that, you transfer the Bitcoins to the second exchange that’s selling the Bitcoin for higher dollars. Then you sell the Bitcoin and withdraw cash in the currency you’re using.
This sounds simple and honestly, it’s not very hard, but the simplicity hides some big problems––problems that can cost you.
The Problems with Bitcoin Arbitrage
While it’s not uncommon to see these types of price discrepancies that allow for arbitrage in the Bitcoin exchanges, many Bitcoin exchanges have expensive processes for withdrawals and charge exchange fees to exchange Bitcoin for US dollars or other currency.
These expenses can create a situation where any profits that you would make through the arbitrage process are lost. And many people actually find that they not only don’t make money, but they lose money.
Another issue is Bitcoin is the technology that it’s built on – a technology called blockchain. The blockchain is incredibly secure, but it’s slow. Transactions can take an hour or more to confirm and transfers can’t be made without the confirmation that occurs in the blockchain.
Buyer Beware of Bitcoin Scams
Unfortunately, there are a lot of Bitcoin scams out there. This includes unscrupulous sites and people who will tell you all the upsides about arbitraging in Bitcoin, without telling you the downsides of the fees and delays in transactions. There are even some sites that will tell you can earn an easy 15 to 20 percent per month doing Bitcoin arbitrage, but these sites aren’t always legitimate.
You can make money mining Bitcoin or trading in Bitcoin and other cryptocurrencies, but to do that you really need to get a good education and know what you’re doing. You also need to understand that cryptocurrency carries a large degree of risk. So, it’s wise to make sure that you have money to lose before you invest.
The Bottom Line on Bitcoin Arbitrage
While many people tout Bitcoin arbitrage as a quick and easy way to make money with Bitcoin, the reality is more complicated. There are hefty fees associated with converting bitcoin from Bitcoin to a government-backed currency and the real-time transactions you need to make arbitrage work well are impossible because of the delay that the blockchain causes.
In my opinion, there are better ways to get into cryptocurrency. Mining is one––but it’s equipment intensive–– and trading is another.
Cryptocurrency is an interesting new market that is really just starting to grow into a powerhouse. Where it will end up is anybody’s guess.