Bitcoin arbitrage is an investment strategy in which investors buy bitcoins on one exchange and then quickly sell them at another exchange for a profit. Because bitcoins trade at different prices on different exchanges, it’s an opportunity that many investors have seized in recent years.
Arbitrage is not unique to Bitcoin investing. It occurs across the capital markets, wherever the same asset trades for different prices in different places. To take advantage of those inefficiencies, investors will buy in one place and sell in another to exploit those price differences.
Bitcoin arbitrage differs from other forms of arbitrage in that it’s harder to place a value on Bitcoin. Because it’s completely digital and not based on an underlying asset, it doesn’t have the same pricing conventions as do equities and bonds, which are tied to the performance of a company, municipality or nation.
With there are more than 200 exchanges available to people investing in cryptocurrency, there are likely to be many different Bitcoin prices available at any given moment for people who want to try crypto arbitrage. But not all exchanges are created equal. Some have enormous trading volumes, while others aren’t as active. The trading volume on each affects the liquidity and the available prices on a given exchange.
How Profitable Is Bitcoin Arbitrage?
Bitcoin arbitrage has the potential to be an enormously profitable way to invest in Bitcoin. One well-known 2017 example saw Bitcoin selling on Kraken for $17,212, but on Bitstamp for a mere $16,979. At that moment, investors potentially stood to make $233 per Bitcoin by buying them on Bitstamp, and then quickly selling them on Kraken.
On a basic level, successful Bitcoin arbitrage depends on looking for gaps between the prices on one cryptocurrency exchange and another, and then executing a buy and a sell. But the number of Bitcoin arbitrage opportunities have shrunk in recent years, as more large institutions with sophisticated trading algorithms have gotten into the Bitcoin arbitrage business with services commonly known as btc arbitrage bots.
Where to Look for Arbitrage Opportunities
Unlike many other cryptocurrency digital assets, Bitcoin has become very widely traded. Starting in 2017, trading volume has taken off from an average of $5-$10 million per day to $100-$200 million per day, which means more overall liquidity, and fewer price inefficiencies for arbitrageurs to take advantage of. That’s why many Bitcoin traders use software applications that track the hundreds of Bitcoin exchanges in real time to find opportunities.
An alternate way to use Bitcoin in an arbitrage play is through something called “triangular arbitrage.” Here, an investor would start with Bitcoin and then trade it for another cryptocurrency that is undervalued as compared to Bitcoin, on that same exchange. The investor would then trade that second cryptocurrency for a third cryptocurrency that is relatively overvalued when compared with Bitcoin. Finally, the investor would trade that third cryptocurrency for Bitcoin, completing the circuit, with slightly more Bitcoin than they started with.
Nowadays almost all Bitcoin exchanges have the software capabilities to create a useful arbitrage tool when placing trades. For instance, on Coinbase, Bitcoin may be priced at $18,600, while on Binance it could be priced at $18,570. Since cryptocurrencies can be priced differently on different exchanges, the opportunity to easily capture profit lies in the price difference between exchanges.
Get up to $1,000 in stock when you fund a new Active Invest account.*
Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.
*Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Bitcoin Arbitrage Tips and Potential Pitfalls
Investors typically need to devote a lot of time and energy to researching and executing a complex trade—not to mention the money required to buy the bitcoin. Trading speed is also a factor as Bitcoin prices change within milliseconds. By the time many investors can execute the trades to take advantage of Bitcoin price differences, those differences may no longer be big enough to be profitable.
Another factor in calculating potential profit is transaction fees on buying and selling across trading platforms. These fees—which vary from exchange to exchange—can sometimes be higher than the profit generated in an arbitrage trade.
The exchanges themselves also pose a risk to investors. One reason that a given exchange may offer such an appealing buy or sell price is that the trading volume on it is very low. And low volume may mean that the exchange can’t execute a trade large enough to deliver the profit an investor is hoping for. Low volume may also mean that the trade is possible, but will take too long to seize the pricing opportunity.
Finally, there’s a risk of loss if an exchange goes under. In engaging in Bitcoin arbitrage, investors might decide to engage with more unfamiliar exchanges—but cryptocurrency exchanges collapse or vanish on a regular basis, as a result of government shutdown orders, or being hacked, or mismanagement, or criminality by their owners.
Is Bitcoin Arbitrage Legal?
Bitcoin arbitrage is legal, as is arbitrage in most other financial assets. Arbitrage plays an important role in creating efficient markets and setting clear prices for market participants.
That said, Bitcoin and other cryptocurrencies are largely unregulated. In the United States, where cryptocurrency adoption has skyrocketed in recent years, officials can’t seem to agree on how they classify cryptocurrencies. The IRS tax guide categorizes cryptocurrencies as property; the Securities and Exchange Commission has called cryptocurrencies a form of security; and the Commodity Futures Trading Commission has called them a form of commodity.
How Are Bitcoin Arbitrage Gains Taxed
Because Bitcoin and other cryptocurrencies are considered property by the IRS, transactions are treated in much the same way as any other property transaction. Investors are expected to report capital gains or losses on the sale of cryptocurrency, taking deductions when permitted and applicable.
With Bitcoin trading on hundreds exchanges, the idea of taking advantage of pricing mismatches for the same asset can seem irresistible to some investors. But it requires careful research before jumping in.
An interested investor should be prepared to do lots of research on different exchanges, different bitcoins, and any fees associated with buying and selling. Additionally, it’s important to have enough money required to execute an arbitrage move and still yield the desired profits.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
For additional disclosures related to the SoFi Invest platforms described above, please visit https://www.sofi.com/legal/.
2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
First Trade Amount