Arbitrage between exchanges

(28th-December-2019)

Arbitrage between exchanges is the most obvious type of arbitrage, because it is very similar to the fiat currency arbitrage (e.g.forex arbitrage) or to the sports arbitrage. The idea is simple: benefit from the differences in prices for the same coin but on different exchanges. For example, see the different prices for Bitcoin in US dollars for different exchanges on the Figure 1, where the price for 1 Bitcoin ranges between 6600 and 8730 US dollars. In this example you would buy for 6600 USD on and sell for 8730 USD, theoretically making 2130 USD or 32% in profits for one single transaction. Sounds good, right? Please do not rush to follow this particular example and read further.

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Let us split the process in steps:

1. Register on both exchanges of your choice

2. Deposit fiat on one exchange and buy a Bitcoin or any other cryptocurrency

3. Transfer cryptocurrency to the other exchange

4. Sell your crypto asset for fiat

5. Withdraw the profit

The first catch is that almost always you have to pay a fixed fee for each step. The subject of fees is quiet complex, you can read all about in the section below. But just to give you an idea, you might pay as little as 3% of your crypto asset or as much as 15%, depending on the exchanges.

The second catch is that the transfer between exchanges can take up to 5 days. Since the volatility of cryptocurrencies is high, the theoretical profit might diminish during this time.

It is possible to reduce the amount of fees and also waiting time. Here is how you could do it step by step:

1. Register on the exchange 1 and 2

2. Deposit fiat on exchange 1

3. Deposit fiat on exchange 2

4. For a part of deposit buy a cryptocurrency on exchange 1, now you have fiat and crypto on this exchange

5. For a part of deposit buy a cryptocurrency on exchange 2 , now you have fiat and crypto on this exchange

6. When arbitrage opportunity presents, buy a cryptocurrency on the exchange 1 and sell the same amount of the cryptocurrency on the exchange 2 at the same time, or vice versa.

Here there is no transfer of the cryptocurrencies between exchanges, that means neither waiting time, nor fee for this step. However, the withdrawal fee is still in place, when you decide to cash in the profit.

Obviously, arbitrage between exchanges is connected to several risks, see section on arbitrage risk below.