How can one find how much "room for arbitrage" is there in the Bitcoin market?

Question

I don't know what's the mathematical/economical definition, but I would define "room for arbitrage" as the amount of money that can be extracted from the market by doing arbitrage (between the different exchanges). I am sure there is a precise definition of such a concept.

So, given this definition - how much room for arbitrage do the current Bitcoin markets exhibit?

Edit - see also on Quora - How do you measure arbitrage?

Answer 1

After studying Bitcoin Arbitrage for the past few months, I've developed an information service to answer this question.

CoinThink.com gives a complete picture of arbitrage. All asks that have a bid at a higher price (on another exchange) are tallied into a total opportunity amount, including the fees for each exchange. It also makes an estimate on the fee for moving money between exchanges. The result is a total dollar amount available for arbitrage.

The exchanges are limited to those that have an automated transfer capability - basically a connection to bitinstant. I am interested in extending the site's functionality to bigger and better information in the future.

Answer 2

I am not an expert on this, but I will answer from my personal experience from the past couple of months. Here are some things I noticed:

• MtGox rules the market. The price there leads and the other exchanges follow. Sometimes TradeHill moves a few decimal points on its own above or below MtGox, but it usually goes back to where it was after a few hours.

• The price difference between exchanges with APIs rarely goes above $0.3 (the most common opportunities are around $0.1/BTC). So with the current fees you will earn very little from each trade - note that on smaller exchanges, it is very easy to move prices up and down so you are doing arbitrage with very small trades.

• You must be fast. There are already people doing this and the opportunities don't stay up for long. If you are not careful your orders will end up pending.

• Exchanges without APIs have much more arbitrage opportunities. Bitmarket for example is some times $1 or more off the current MtGox price. Of couse it is also much more time consuming to arbitrage manually.

• There are days when nothing happens and others when a lot happens. You have to be ready and keep a lot of money on each exchange if you want to catch it all. There are huge volume differences so you should split your money accordingly.

I am still testing things out, but I don't think that you can make a lot of money out of this. It may be interesting to use it as a complement to other automated trading strategies though.

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Just another note:

• Moving money/bitcoins around to grab opportunities in exchanges with APIs won't work because of fees (even if small) plus waiting time. You usually have a few minutes to grab opportunities. If you are lucky you can sometimes find an opportunity that lasts a couple of hours, but that happens like once a week.

All of this is from personal observations during July/August 2011. Things will of course change and the market will probably become more and more efficient.

Answer 3

There are on occasion decent opportunities for arbitrage if you are willing to go through the hassle for a few bucks.

Here are two data services that are useful: - http://nyse-group.de/bitcoin-arbitrage - http://fnoose.com/bitcoin/arbitrage

The opportunities are the largest after a sudden move in the price on the leading exchange, Mt. Gox which leaves scraps that can be picked up by performing arbitrage against open orders left on other exchanges.

Of course, to do so means you needed to have funds sitting out there on the other exchanges in order to be among the first with access to do those trades.

The delays in adding bitcoins (waiting for the transfer to confirm) or in adding funds through other channels (e.g., Dwolla transfer) mean arbitrage opportunities might evaporate as those with the open orders become aware that the market has moved and will cancel their orders. Eventually, in the range of tens of minutes or hours at most decent arbitrage opportunities that yield a few dollars or more will get attention from a trader performing arbitrage.

Because Bitcoin has so many different currency markets, one service that enables the ability to transfer cash out of the exchanges might be useful: http://en.bitcoin.it/wiki/CurrencyFair CurrencyFair was reviewed recently here: http://www.bitcoinmoney.com/post/7259588518 and Nyse-Group's arbitrage viewer was reviewed here: http://www.bitcoinmoney.com/post/7000316379

The ability to move funds to and from exchanges, nonetheless movement between exchanges, was a topic addressed by Rick Falkvinge: http://falkvinge.net/2011/06/10/bitcoins-four-hurdles-part-four-exchanges

Answer 4

See this pdf for more information.

If you were asking about a two currency arbitrage between different markets. For example, the BTC/USD exchange rate at MtGox and one at Intersango then the following formulas apply considering brokerage fees at both exchanges.

For simplicity I am using BTC as the base currency and USD as the quote currency, but you can exchange these easily.

Assume:

• A is the exchange rate of BTC/USD on exchange MtGox
• B is the exchange rate of XXX/YYY on exchange Intersango
• Fa is the fee of MtGox
• Fb is the fee of Intersango

There is a no arbitrage opportunity if A = B + ( Fa + Fb )

But if A - B > Fa + Fb then the the base currency, BTC, is cheaper on exchange B than in A. So the person would buy BTC on Intersango (B) and sell BTC on MtGox (A).

profit = A - B - ( Fa + Fb )

If B - A > ( Fa + Fb ) then the base currency, BTC, is cheaper on exchange A than in B. So the person would buy the BTC on MtGox (A) and sell it on Intersango (B).

profit = B - A - ( Fa + Fb )

Other arbitrage opportunities will exist such as triangular arbitrage. But those won't develop until the exchanges not only have BTC/fiat currency pairs but other currency pairs as well.