The world’s first cryptocurrency rose from being worth less than $0.01 in 2009 to over $2,000 in 2017. Despite it being very volatile, bitcoin is less affected by other currencies and is perceived by some as the safe-haven asset of the future. Bitcoin trading typically happens at bitcoin exchange, this is the place where people buy and sell bitcoins for fiat money. Just like with any other currency, bitcoin has its own value which is determined by supply and demand. When demand for bitcoins increases, the price increases, and when demand falls, the price falls.
Bitcoin Trading Platforms
But not every exchange offers advanced trading tools. Some of the exchanges are buying/selling bitcoins only services and this is not good enough for real bitcoin trading. A trader needs various trading tools to make efficient orders according to the strategy. Also, an exchange needs a bitcoin marketplace with high liquidity, meaning that every time a buy/sell order needs to be done, there are enough buyers and sellers on the market.
An exchange that has bitcoin trading tools and a marketplace available is usually called bitcoin trading platform. Some of these platforms are limited or specialised to bitcoin trading only (like Magnr), others provide trading market for more crypto-currencies (for example, you can trade bitcoin, litecoin and ethereum on Bitfinex). There are also several general and regulated trading platforms that are now listing bitcoin as a currency and bitcoin derivates (like AVA Trade). Find more about bitcoin trading platforms on our dedicated page.
Bitcoin Arbitrage Trading
Arbitrage is the practice of taking advantage of the price difference between two or more bitcoin markets. In order to profit from the price disparity, you have to buy bitcoins on one market for immediate resale on another. This results in immediate, risk-free profit. Since bitcoin is traded on online exchanges these price differences emerge because some exchanges are more liquid than others. Bigger exchanges with more trading power will drive the price of the rest of the market. Smaller exchanges follow the price of larger ones, but with a small lag. That small lag is what makes bitcoin arbitrage possible.
Manual bitcoin arbitrage trading
Get involved in arbitrage just by having accounts on multiple exchanges with a balance in each one. When an opportunity arises, you simply buy and sell immediately without having to transfer funds between accounts. You can also buy bitcoins on one exchange and resell them on another by transferring funds (the risk in doing this, of course, is that the price might change between when you buy and when you sell as transferring and confirming funds takes some time).
Bitcoin Trading Software
You can manually check each bitcoin Exchange for a current value, or you can buy a software to help you with that. Automated trading bots will do the job of selling and buying bitcoins instead of you. These bots are simply software programs that link directly to exchanges and place buy and sell orders on your behalf automatically. They make those decisions according to a set of predefined rules and by watching the market’s price movements. You can set your own rules or take rules from some other trader. Find more about bitcoin trading software.
Bitcoin arbitrage funds
Arbitrage trading takes a lot of time and effort if you trade manually. As with any other business opportunity on the internet, for a small fee, somebody else can do that for you. If you want, somebody else can do bitcoin arbitrage for you by joining bitcoin arbitrage trading fund. How does that work? In general, you deposit some amount of money into the bitcoin trading pool. The provider will then daily look for trading opportunities and try to make some profit out of price difference between two or more bitcoin markets. They will share some of the profits (or losses) with you.
We have invested in BitBays. This is an exchange website which pays a small promotional interest rate on all balances held on their site, but if you want to earn a little bit more than that you can also put your funds in an arbitrage fund that they run, which at the time of writing offers a variable rate around 10-12% APR and the option to invest using either USD, BTC or CNY.
The problem is that many so-called funds were scams in the past, so you should be cautious when you are invited to invest in this kind of services. We only list funds that we have deposited money and we know they pay regularly (however, this is not a guarantee that they will do in the future).
Problems of Arbitrage Trading
- Not enough opportunities – arbitrage trading depends heavily on the availability of arbitrage opportunities in the market. Sometimes there are not enough opportunities for the volume you would like to trade.
- Changing prices – sometimes the prices on different exchanges are changing, before a deal could be executed, due to the delay between selling in one place and buying in the other. By that point, the arbitrage opportunity may be invalid and the trade becomes unprofitable.
- Fees – another challenge are the fees associated with each trade, that can eat away the profit margin.