What is Bitcoin arbitrage and how does it work?
The financial world is buzzing over the growing popularity of Bitcoins. What they are and how to trade them are common questions asked by eager investors. Although it may seem like a risk-free form of investing, there are quite a few things to watch out for. When traded successfully, time will tell if Bitcoin proves up to the hype.
Bitcoin Arbitrage In A Nutshell
If you buy a baseball card at a garage sale for $10 and sell that same card on eBay for $15 you’ve made a profit of $5. You’ve completed a successful arbitrage trade. Arbitrage in the financial world is when an asset or security is bought and sold simultaneously on different exchanges to make a profit on the difference. This form of trading is what keeps the prices of securities the same on all of the exchanges. High-frequency trading algorithms are used on the stock market for example to find the arbitrage opportunities and automatically complete the trade.
A very basic example is if a security can be purchased for $50 on one exchange and then sold on another for $55, the investor can make a quick profit of $5.
Know The Risks
Before you can trade Bitcoin you must first purchase it using money in your own currency. After you’ve completed your arbitrage, there are often expensive penalties and high fees associated with converting your Bitcoin back to cash. These fees and costs can quickly eat away at your newly made profits.
To be profitable with Bitcoin, you also need to trade large volumes of money which makes this form of investing risky for someone without a good safety net in place. Exchange rates are also changing very quickly.
Using Bitcoin As An Investment Strategy
Investing with Bitcoin can be a really profitable one when you know all of the risks. With the newness of Bitcoin and the volatile environment in which it is traded, there are still a lot of unknowns. Monitoring the ups and downs of the market is key to performing a successful arbitrage. For someone without the time to keep a close eye on the Bitcoin market, arbitrage trading may not be feasible. Using Bitcoins more like stocks as a long-term investment may be better suited for passive investors.
Wherever you fall on the investment scale, know that Bitcoin trading is picking up steam quickly. With any form of investing, keep an eye out for hidden fees and educate yourself as best you can before taking the plunge. May the odds be ever in your favor.