Trading bitcoin is all the rage. There are many ways to make money. But everybody is looking to get an edge on the other players in the trade game. Some bitcoin traders are using arbitrage to get the upper hand. Should you resort to that kind of strategy?
For those unfamiliar arbitrage is a strategy when, instantly, you buy something at one value in one market, and immediately sell it for a higher price on another market. For example: Let's say you collect memorabilia and find that one of your neighbors has a rare baseball card. You know the real worth of it. Let's say its 500$ and you buy it from him at a 100$. That means you have profited 400$ buying and selling the same thing.
Arbitrage works in similar ways, but with stock or bitcoin. With the arrival of computers and stock synchronization, arbitrage has become a few seconds of hope in an ever correcting machine. Since you need huge amounts of money combined with much software and manpower positioned at the right time at the right place, this kind of strategy is primarily used at big firms or hedge funds. In today's economy, it is virtually impossible to profit by arbitrage without impressive computing power.
If you are still tempted by arbitrage and what to use it to trade bitcoin, the best way to succeed is to invest in software. Keep updating it and adding new ones as soon as they are available. That is the only way to keep up if arbitrage is your preferred strategy in trading bitcoin.
There are a few types of arbitrage.
Uncovered Interest Arbitrage
This is by far the worst kind of arbitrage, the one that carries the most risk out of all types. TO make it work successfully you have to guess future spot exchange rates.
This is the bread and butter arbitrage of all bitcoin sellers. Some countries, like the USA, have a tax on bitcoin transactions. Some countries don't, like Germany or Denmark. This means if you buy in the USA and sell abroad, you will add the amount of tax saved to your starting trade profit.
This is a very complex strategy. IT is dense with mathematical formulas. You have to have great expertise with options trading to pull this one off.
This type of arbitrage is also quite heavy on mathematics, perhaps even more complex than the Dividend type. There is some resemblance to pairs trading. But its complexity far exceeds that of pairs trading. You profit by buying long and short and the price movements between your buys.
In most cases, this is done in foreign exchange trading. Usually, it happens with trading currencies. For example, you buy dollars, convert them to euros, followed by another conversion to the British pound, and sell them back as US Dollars for a profit.