First, some caveats. I spot checked exchange websites to verify these prices. It appeared like I could trade the Bitcoin/USD pair on each of these exchanges. How the exchanges adjust their local currency into USD could cause the price differences. For example, the Chinese exchange might use a delayed quote to adjust their price from Yuan to USD for advertising purposes. Then, when you try to trade you’ll see a different quote. What follows below is just a thought exercise – do not take it as anything more.
Want to make ~10% of your money instantly?
Buy bitcoin on Poloniex and sell on LakeBTC. Poloniex lists themselves as a Wilmington, DE company whereas LakeBTC is Chinese. So if that geographical difference bothers you, then flip to GDAX or Gemini vs Poloniex where the arbitrage is closer to 5%.
Why is the Price Difference Between Bitcoin Exchanges so Big?
There is no real linkage between various Bitcoin Exchanges. Historically stock exchanges didn’t have linkages either and it was market participants who made their living arbitraging between exchanges. As more arbitrage players step in the price spread between exchanges shrinks. More players, more competition, smaller (aka “tighter”) spreads.
Why haven’t arbitrage players/market makers jumped into Bitcoin?
Well, many have. There are players in the arb game already but there are some challenging barriers to entry.
Exchanges often have API’s which allow you to connect and with a bit of code you could be on your way. Now the fun part.
Bitcoin wallets are local to the exchange.
There is no “central” wallet (that I’m currently aware of) which all the exchanges connect to. If you are trading on OKCoin you have to have a bunch of funds on that exchange. If you want to arbitrage against Gemini you need funds there, too. What happens if you buy a bunch Bitcoin on OKC and then need to sell a bunch on Gemini? Suddenly you’d be out of cash on OKC and flush with cash on Gemini. You then need to either transfer cash or Bitcoin to OKC so you can buy more on that exchange.
Great, lets transfer more cash to OKC:
This can be time consuming – will the exchange take in the funds instantly? When arb’ing time is of the essence. Additionally, many exchanges won’t take US customers. Some find ways around this of opening local companies and local bank accounts. Enter in the issue of currency.
If you’re primarily in USD’s you might have to account for the currency conversion to the local exchnages currency. OKC is in China, so you have to get USD into Yuan and factor that into your arbitrage. When the price spread is $200 between exchanges this might not matter much – but when that spread gets tighter it may become a problem.
Option two: send Bitcoins from Gemini to OKC: Generally this is cheap and efficient. BUT, Bitcoin has been known to have some network issues that slow down the transfer of Bitcoin from one wallet to another. Particularly when the prices are really moving fast. As an arbitrager its when markets are moving fast that you’re most likely to have to move Bitcoin between wallets. Lets say you need funds at OKC immediately because you sold some at Gemini – a 5 minute delay in sending coins could wipe out your arbitrage.
Keep in mind – most arbitrage players want to trade on many exchanges simultaneously not just two. You can see how this could get confusing quite quickly.
These problems are solvable, but far from trivial.
Enter Bitcoin Exchange “counterparty” risk.
Alright, you need to keep a bunch of funds distributed to all the various exchanges on which you trade. As any long time Bitcoiner will tell you, keeping funds on an exchange brings a lot of risk. You’re exposed to everything from hackers hitting the exchange (see Poloniex) to the people that own the exchange just deciding your funds are theirs (see Mt. Gox). Certainly exchanges are getting better and more secure as they evolve. Buy lets say the Konim exchange messed up your wire transfer. They’re Turkish – do you speak Turkish? There are also plenty of stories involving US Banks which aren’t wild about your evil cryptocurrency related money transfers. So they hold up your funds.
These and others are all risk that you have to consider.
All that aside, it appears there is money to be made. Its also a safe bet that more players are going to pile in, technology will improve and the price difference between exchanges will close up. For most of us normal “buy and hodlrs” that means more efficient markets.