Cryptocurrency Arbitrage – Easy Money or Empty Promises?

Arbitrage sounds like a quick and easy way to make a quick buck on cryptocurrencies. Since the markets are still unregulated, price differences on coins that can go as high as 10% or greater, especially when one of the exchanges has very low volume with few sellers.

But it’s also easy to get caught up in the cross hairs of trying to flip a coin. Here’s a few caveats:

Quick Corrections

Fast moving coins with high volumes will begin to correct price discrepancies, sometimes within a matter of seconds. So if you try to buy low on one exchange and then make the withdrawal to send it to another exchange in order to sell it for a higher price, the price discrepancy (and your future profits) may have just evaporated.

Wallet Woes

Exchanges randomly stop withdrawals of various coins for “maintenance”. If you haven’t checked the withdrawal status, you may end up hodling the coin instead of moving it to another exchanges.

Exchange Issues

Although cryptocurrencies are borderless, the exchanges are not. Bitfinex recently banned American citizens. And many exchanges require a verification process before you can move coins and cash out into fiat. Although you may be able to open an account, deposit funds and successfully close a buy order, you may not be able to make any withdrawals until you prove that your nationality aligns with the regulations of that particular exchange. Exchanges also have different levels of verification with different maximum amounts for withdrawal.

For example, if you try to arbitrage between Bithumb, a Korean exchange, and Gemini, an American exchange, you’ll be subject to the verification rules of the exchange where you try to sell “high” and cash out. Bithumb states that “All withdrawal would be done after the administrator check the request detail”. Gemini will only make withdrawals to the bank account on file. Each exchange has its own rules.

Hidden Fees

Exchanges also charge fees for every trade. To calculate your profits on an arbitrage you need to calculate the fees for each trade in the transaction along with applicable taxes, primarily short-term capital gains taxes, if the transaction is closed and immediately converted to fiat. For US citizens capital gains taxes fluctuate depending on your tax bracket.

Bottom Line

Arbitrage opens the door for more speculators in the crypto markets. The impact of such trading, along with pump and dumps, contributes to the notion that cryptos are unstable, risky, volatile investments that lack regulation and create bubbles. That characterization often implies that the stock market has been speculation-free without the trappings that cause bubbles (housing bubble, student loan bubble, junk bonds bubble). Wherever markets emerge, profit strategies and opportunities follow, in traditional instruments such as derivatives or new hybrid models such as Bitcoin futures. Beyond the quick buck are the long-term hodlers who invest in smart projects that are solving huge problems.