Bitcoin currency arbitrage

While this carries only a modest 0.1% fee, you’ll be transferring your funds to Bitstamp’s bank in beautiful Ljubljana (via the U.K.). In many cases it will cost you some money on your side, since it will be an international wire transfer.

Once the funds do hit your account, look for a 0.5% fee to purchase on the exchange. But now you’ve got the BTC in hand…or whatever passes for a hand in this case.

Difficulty: Medium. Cost: 1%. Time: Up to a week. Near instant once funded.

Transfer to Mt.Gox.

Transferring BTC is the fast and easiest part of this. While there are sometimes small fees for processing the transaction, they are currently minuscule; hence two of the main reasons people are so excited about bitcoin.

Difficulty: Very Easy. Cost: 0%. Time: Near instant.

Sell on Mt.Gox.

Selling BTC on Mt.Gox is relatively easy. You should once again have a verified account — at this point your passport has traveled significantly more than you have — but the order is relatively simple.

Difficulty: Easy. Cost: 0.6%. Time: Near instant.

Transfer the money back to Bitstamp.

Neither exchange will allow you to send money directly to the other one — you must withdraw it to your own bank account and then resend it. An international withdrawal will cost you 2000 JPY on Mt.Gox, if it goes through. Assuming this is a $10, 000 transaction, that is about 0.2%. It will also take a few business days, and you’ll initially be limited to $1, 000 every 24 hours — but we’ll assume you smooth talked your way to a higher limit (you dog). And we already know to expect about 0.5% costs and another few days to get the money to Bitstamp again.

Difficulty: Very Hard. Cost: 0.7%. Time: 1-2 weeks.

UPDATE (2/4): Many people have written me to say that this is overly optimistic. Indeed it appears transferring USD out of Mt. Gox has become incredibly unreliable. CoinDesk is currenty running a poll on Mt. Gox issues. The results should be interesting, and they will most likely be worse than the assumptions above.

Repeat until the difference is 0%.

So far we’ve only accrued about ~2.3% in fees, leaving ~2.7% of arbitrage left. Although the time differences are prohibitive, we could overcome them by having a large balance sheet on both exchanges — say $200, 000 total in order to execute $10, 000 of arbitrage each day, which would yield $270 of profit and allow 2-3 weeks for the money to cycle. While $270 per day on a base of $200, 000 is only ~14 basis points, it’s still arbitrage. At the end of a year of doing this every day, you’d have a profit of nearly $130, 000 (if you added your profit each day to your trading book).