Is instant profitable arbitrage impossible?

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Case #1: Trade coins after an arbitrage opportunity appears.

  1. Buy Coin B with Coin A at a low price.
  2. Move Coin B to the buyer's market.
  3. Sell Coin B for Coin A at a higher price.

However, transaction fees, withdrawal fees, the time withdrawals take, and the presence of other arbitrage bots ruin its success. I've monitored the market for opportunities and tested this case, and so far I've only found the impracticality of it: stuck-withdrawals, opportunities that disappear, transaction minimums and fees, etc...

Case #2: Hold 50/50 coins and instantly trade them.

This case puzzles me. It is simply not practical.

  1. There are over one hundred alt-coins of which one would have to have funds.
  2. Apart from the alt-coin opportunity funds, one would need a proportional amount of LTC & BTC.
  3. Most (if not all) of the alt-coins' value is volatile. It makes no sense to steadily hold funds in those "currencies". Whatever small gains acquired by arbitrage would soon dilute.
  4. If one had the hundreds of alt-coins required, and some (mysterious) way to manage their volatility. The size of the arbitrage opportunities available wouldn't match the ROI a traditional investment offers.

Edit 1: Nitpicking the issue, it is possible to perform arbitrage on counted occasions. But I'm referring to the fact that #1 is not instant, and it's riskier and possibly not profitable. And case #2 is flawed in the sense that is not straightforward to hold (and increase) value in a portfolio of crypto-currencies.

I've seen some "professional" crypto-coin arbitrage services, but they look more like scams than anything else. Is there any truth to crypto-coin arbitrage? Is there a case #3, 4, 5, ..., n?

JustAnotherStackOverflowUser

Posted 2014-03-22T22:18:16.970

Reputation: 113

1You can do case #1 using Ripple nearly instantaneously (even atomically if you make custom circular payment transactions) for assets that are traded on Ripple. In that case your step 2 usually involves a third asset instead. E.g. USD->BTC->XRP->USD where you end up with more USD then when you started. – dchapes – 2014-03-22T22:26:21.210

Answers

1

Both are possible; in fact, I do both when the opportunity arises.

For #1, for example, I have successfully conducted an arbitrage on UTC, by buying in at Crypto Rush for 0.00018 and selling it on Mintpal for 0.00019. You definitely have some risk here of not executing the trade quickly enough, so look for markets that are reasonably liquid (i.e. relatively low bid-ask spread). I've done similar arbitrages at least five times. It's not going to be super profitable, but it's a nice opportunity to take advantage of.

For #2, it all comes down to what kind of a long position you wish to hold. So for instance, if you wanted to hold 0.2 BTC and 100,000 DOGE in the first place, then it makes sense to spread them across two exchanges, with 0.1 BTC and 50,000 DOGE at each. When the bid of one becomes higher than the ask of the other, execute the arbitrage ASAP. Of course, it goes without saying that you should not attempt this strategy on a coin that you did not intend to gain exposure to in the first place.

Tony

Posted 2014-03-22T22:18:16.970

Reputation: 1 114

Have you not had any problems due to withdrawals? Doesn't it bother you to have long positions in such unstable things? I mean, suppose you had DOGE, DOGE has been on decline for quite some time now. That money would be better invested elsewhere. An arbitrage gain wouldn't amortize the value lost in the DOGE's loss of value. That wouldn't be a wise choice I think. – JustAnotherStackOverflowUser – 2014-03-23T10:51:54.520

1Hindsight is 20/20. Just because DOGE has actually lost value, doesn't mean that it was a bad idea to invest at the time. If you don't believe in any altcoins, then don't use strategy #2. I'm saying that for the people who are investing in altcoins anyways, arbitrage is a good way to get extra money regardless of whether you gain or lose on the investment. (And yes, the amount of money earned from arbitrage is a tiny bit compared to the change in prices, but if you don't do arbitrage you are guaranteed to be worse off than if you did do it, assuming the same long-term position.) – Tony – 2014-03-23T18:22:23.447

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CEX.IO has BTC/LTC, BTC/NMC, BTC/GHS, and NMC/GHS trading with low minimums and no trade fee. As noted before, the downward trend in altcoins relative to BTC means you will be better off to buy and hold BTC. Also, volume is low enough that if you try to move more than a small amount you can push the price around enough to ruin the arbitrage opportunity you saw at the start of a trade.

UPDATE: As e-sushi noted, CEX.IO is now charging a trade fee, which makes arbitrage even more of a bad idea.

hsmiths

Posted 2014-03-22T22:18:16.970

Reputation: 741

I still don't get what's the deal with CEX.IO. They trade... mining power? :S – JustAnotherStackOverflowUser – 2014-03-23T20:23:43.380

1It's basically like buying someone else's machine that can hash at a certain rate. They also let you trade between coins alone. – Tyler – 2014-04-23T03:31:04.600

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…no trade fee…” – Wrong… they charge you 0.2% per trade! For reference purposes, check *https://cex.io/transaction-fee* which explicitly states “CEX.IO currently charges a fixed 0.2% commission on all buy/sell transactions, excluding those of trading Futures Contracts.”

– e-sushi – 2014-11-15T03:14:19.667

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Case #1 wouldn't be arbitrage because it takes so long to transfer coins between exchanges. Arbitrage by definition is risk free profit due to pricing differentials. Sure some may be willing to say being exposed to the market for a second or two isnt particularly risky and should qualify as arbitrage, but it takes a lot longer than a few seconds to transfer coins between exchanges

Case #2 wouldnt be arbitrage either. By holding coins you're exposing yourself to a great deal of risk.

Matt

Posted 2014-03-22T22:18:16.970

Reputation: 409

So what you are saying is that these cases are not arbitrage because there are risks involved? I mean, you could buy a commodity in one country, ship it to another, and sell it for a profit; if there's still risk, it is no longer arbitrage? – JustAnotherStackOverflowUser – 2014-05-23T04:50:15.210

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Basically, yes. In purely academic terms for it to be arbitrage the operation would need to be atomic (happen at the same time). Although many people in finance would consider being exposed to market risks for a very short period of time to still be arbitrage. http://en.wikipedia.org/wiki/Arbitrage

– Matt – 2014-05-23T06:24:22.003

1I guess for crypto currencies the only thing you could do which would qualify as arbitrage would be inter-market intra-exchange arbitrage. Although there exists the opportunity to profit from inter-exchange pricing differentials, arbitrage isnt the most accurate term to use due to the amount of time it takes to exploit the opportunity, and the risks associated with being exposed to the market for that period of time. And considering the title of this question contains the word "instant" I would think my answer would be relevant, even if it is arguing semantics. – Matt – 2014-05-23T06:28:54.630

It seems I'm out of touch with the academic definition, thanks for the clarification. Care to expand on inter-market intra-exchange arbitrage? I'm all right if you want to edit your answer. – JustAnotherStackOverflowUser – 2014-05-23T06:46:08.723

1regarding inter-market intra-exchange, see the last sentence of dchapes's comment to your question. – Matt – 2014-05-23T07:24:48.190

So by inter-market intra-exchange you mean moving "instantaneously" in the same exchange, regardless it is Ripple or whatever. As long as it is instantaneous and between different currencies in the same exchange. Am I right? – JustAnotherStackOverflowUser – 2014-05-23T08:44:40.990

1Well it wouldn't happen "instantaneously", it would take a very short amount of time for the 3 trades (USD->BTC->XRP->USD) required in dchapes's comment to be executed. But if you were to automate it, you could get the risk down fast enough that a lot of people would likely call it arbitrage. Regarding Ripple, I am unfamiliar with it and their website is designed with a horrible wordpress theme, which I'm not motivated enough deal with to figure out wtf it actually is. – Matt – 2014-05-23T16:30:17.847

0

If it were possible, people would be already doing it, and by definition of how the market works, it would even out the differences.

Madzi Konjo

Posted 2014-03-22T22:18:16.970

Reputation: 756