Want to know how to take advantage of major price discrepancies across digital asset exchanges?
The range of Australian crypto exchanges brings opportunities for traders, especially in times of volatility and market dislocation.
Due to the de-centralised nature of cryptocurrency markets, with many sources of global liquidity, arbitrage has been a viable option, but never as much as it has been recently, in the recent volatility.
If we take the price of 3 of Australia’s biggest exchanges, Mine Digital, BTC Markets, and Independent Reserve on the afternoon of the 13th March 2020 we see that we have the following prices to buy and sell.
Mine Digital … … … … Buy $8 081 … … Sell $7 975
BTC Markets … … … … Buy $8 348 … … Sell $8 295
Independent Reserve .. Buy $8 399 … … Sell $8 200
The arbitrage opportunity here is very simple.
We buy Bitcoin at Mine Digital for $8 081
Then we sell them at BTC Markets for $8 295.
The difference is 2.6%, a $214 AUD difference if we can trade a full Bitcoin at both prices.
Now, what about fees?
Mine Digital are a 0.10% maker (limit order) and 0.20% taker (market) order fee structure.
BTC Markets are 0.85% for small volume, all the way to a 0.10% fee for > $ 5,000,000 monthly volume
Independent Reserve are 0.50% for small volume, 0.10% for $4,000,000 monthly volume and as low as 0.05% for $10,000,000 monthly volume.
So the arbitrage in this instance must have the fees added.
This means that the real price you are buying from Mine Digital is $ 8 081 + 0.10% = $8 089
The real price you are selling to BTC Markets is $ 8295(minus) 0.85% = $ 8 224
Your net profit is $135 AUD once the transaction is completed.
So the arbitrage concept is fairly simple in theory, but let’s take a look at some of the risks.
1. The first consideration that is obvious enough is the time between buying your Bitcoin and selling them, and the direction of the market in the meantime.
This is where a trading instinct comes in handy. If you are comfortable buying Bitcoin at any particular price, then this risk ought to be lower. If the trader in you expects the market to collapse in the time it takes to transfer Bitcoin between Mine Digital and BTC Markets, then you could be more interested in holding off on making the trade.
2. The second is that you need to wait until you are paid out by BTC Markets — incurring fees and waiting for a bank transfer from BTC Markets to your bank, and from your bank to Mine Digital.
This could take a couple of days and a lot of monitoring, you might see trades that you’ve missed and it could be frustrating.
Rather than converting your BTC back to fiat from BTC Markets and waiting a few days for the transfer to clear — another option is to convert the sold BTC to XRP (it transacts faster than other tokens) and then send back to Mine Digital and start the process again. So long as the price discrepancy remains (on/ramp is cheaper than the off/ramp at either of the other two exchanges) you can continue this cycle, and take advantage of the price discrepancy.
How to lower the cost of your fees?
Some exchanges, including BTC Markets and Independent Reserve charge fees based on the volume traded of a particular asset.
You may consider trading any arbitrage at all (where your gain is minimal) in order to increase your volume per month, and reduce the fees you pay.
For example, if you trade 1 Bitcoin 10x times at the current price ($160k of trades, after trading back through XRP), your fees on BTC markets will become 0.30% and your fees on Independent Reserve will be 0.46%.
Arbitrage trading is a great way to get into trading markets, where you will gain an understanding of how markets move, of what the actual risks are in the market as well as beginning to watch the market much more closely than you normally would.
On your busiest day you might be able to get away with making this trade every hour or 2, upto 10 times a day.
Not too bad for a days work.