Having obtained a diploma in Intercultural Communication, Julia continued her studies taking a Master’s degree in Economics and Management. Becoming captured by innovative technologies, Julia turned passionate about exploring emerging techs believing in their ability to transform all spheres of our life.
Just like traditional stocks, the value of Bitcoin can change from the time you place the buy order to the time the order is processed.
Question: Can you buy cryptocurrency on one exchange and sell it on a different exchange?
Question: Why would you want to do this, and what is it called?
Answer: It’s call Arbitrage, and cryptocurrency investors do it to make money.
Just like any other asset, cryptocurrencies are worth what someone else is willing to pay for them. And as it happens, Bitcoin is worth more in certain areas of the world, as well as between different exchanges. This means there is a profit margin that savvy traders can exploit -and it is perfectly legal.
This is a practice known as arbitrage, where you buy Bitcoin (or another cryptocurrency) on one exchange and then sell in on a different exchange where it has a higher value. Arbitrage is a common market practice; cryptocurrency investors did not invent the practice. It is simply buying from one exchange and selling the same asset on another exchange so the owner can turn a profit.
Why Is Arbitrage Work Done?
The reason why you might and turn around to sell them immediately elsewhere is that there will always be variations of the cost of Bitcoin, from one exchange to another. And sometimes there is a large enough variation that you can make a substantial profit.
Exchanges price cryptocurrencies at what they can sell them for. That means that larger exchanges can move larger amounts of Bitcoin faster than smaller ones can. This also means that they can sell Bitcoin at a lower price.
On the other hand, smaller exchanges move smaller amounts of Bitcoin, so they have to charge more for Bitcoin. It is almost like shopping at a convenience store versus shopping at Costco -volume discounts apply.
The Math and Profit Margins
The potential profit from arbitrage varies greatly, of course. It also has a lot to do with how advanced you are as a cryptocurrency trader. That’s because if you are going to make this work, you need to know which exchanges are selling Bitcoin for more and which for less.
But if done correctly, arbitrage can be very profitable.
Here is a little bit of hypothetical math to show you how the profit is earned through arbitrage.
Bitcoin is selling for $1000 on exchange A
Bitcoin is selling for $1050 on exchange B
You buy 100 Bitcoin at $1000 on A for a total of $100 000
You then sell them on B for $105 000
That is a profit of $5000 in a matter of hours ($50 x 100 = $5000)
When to Try Arbitrage
Cryptocurrencies are incredibly volatile, and many factors affect their volatility. This is why arbitrage can work so well. The value of Bitcoin changes from one second to the next. However, it can also be a bit of a misfire. Profit loss can occur due to simple slippage. Just like traditional stocks, the value of Bitcoin can change from the time you place the buy order to the time the order is processed.
Also, Bitcoin transactions can take up to 6 hours to be fully confirmed on a given day. This is uncommon, but you cannot guarantee the exact timing of any cryptocurrency transaction. And so, in those 6 hours, the price of Bitcoin can change. (That means that exchange A is no longer selling Bitcoin for $1000 a few hours later, for example.)
As mentioned, arbitrage works when you know the cryptocurrency markets well and have been trading for a while. This is not for the green trader. Why? Because all of your trades need to happen in a matter of moments. So, you need to know exactly what you are doing. But if you do, then there are profits to be had!