Joseph Krug

Bitcoin An arbitrage opportunity!!March 23, 2014

What is bitcoin?

❖ An electronic currency!

❖ 24/7 transactions w/o bank holidays within 10 min. !

❖ No borders!

❖ Secured by cryptography!

❖ 1/10 US cent transaction fees on average

The Price Spread

❖ As of the time of this writing, the price spread is $8 per bitcoin!

❖ When process conceived spread was $15, so it appears some people are taking advantage of this op.

Problems with arbitrage

❖ In the past you could arb the China price vs USD price of bitcoin. !

❖ China ~$685, US ~$575. Insane right?!

❖ Except it required you to sell in china, wire to US, then buy again. !

❖ Takes 7-10 days. Price increases while wire to US...

❖ Alright, so I managed to find a 3% arbitrage opportunity between two random exchanges!

❖ Will get killed with the wire transfer fees of 1-2% per exchange!

❖ Trading fees of .5%!!

❖ Your profit is wiped out.

A Great Arbitrage Op❖ We want a few things:!

❖ Minimize holding of fiat during the middle of an arbitrage round (waiting to buy btc)!

❖ Minimize volatility from bitcoin price gyration!

❖ Minimize transaction costs!

❖ Minimize time spent, less time = more rounds = more profit!

The Process

❖ There really is only one worthwhile bitcoin arbitrage strategy out of the dozens of pairings I've analyzed that doesn't fall apart. !

1. Get (somehow) some bitcoin startup capital. !

2. Sell it on bitstamp (Euro bitcoin exchange)!

3. Withdraw the money via SEPA to your EU bank account. (1 - 2 days) - many times SEPA transfers are even same day. !

4. SEPA transfer the money to btc-e (a Ukranian btc exchange) - will discuss risks on another slide. (1-2 days)!

5. Buy bitcoin $7 cheaper. !

6. Send the btc to bitstamp !

7. Goto step 2. !

❖ Time Per Round: 4 days and 15 minutes. !

❖ Fees: 10 Euro + .2% trading fees x 2 + 1% deposit fee btc-e

The Process (with more & riskier profit)❖ Discuss the use of Okpay! !

❖ Unless spread >1.5% SEPA fees & tx costs to trade will wipe out profit!

❖ Low spreads, alternative method.!

❖ 1. Transfer money using SEPA to Okpay (EU paypal)!

❖ 2. Transfer via Okpay to btc-e (0% fees) (vs normal 1% fee to do this)!

❖ 3. Buy btc on btc-e (.2% fee)!

❖ 4. Transfer btc to bitstamp!

❖ 5. Sell on bitstamp (.2% trading fee)!

❖ 6. Goto step 1!

❖ Total cost: .2% x 2 trading fees + 10 Euro SEPA!

❖ Time per round: about 6 days (3 SEPA transfers)

Why's SEPA so Great?

❖ Flat €5 transaction costs no matter the tx size!

❖ Super quick vs 7-10 day traditional wire transfer!

❖ And btc-e only accepts transfers from European bank accounts. (US MSB regulations unfavorable)

Btc-e Risks❖ Been around about 3 years (long in the bitcoin world)!

❖ Based in Ukraine !

❖ Only issue is if Russia annexed Ukraine completely!

❖ Russia hostile —-> bitcoin!

❖ In this case get out!

❖ Only in btc-e for a few minutes to buy and withdraw though so risk is very slim

Okpay Risks❖ Largest payment processor for bitcoin currently!

❖ Seems somewhat risky, lots of complaints online about requiring more documentation before they accept transfers!

❖ Seem to be very afraid of breaking any ML laws so they require lots and lots of paperwork!

❖ People have transmitted large sums fine though after getting prior approval by submitting sufficient ID

Bitstamp Risks

❖ Practically nil.!

❖ Largest bitcoin exchange!

❖ Operates out of UK!

❖ Audited by 3rd parties, proof they have their bitcoin!

❖ Using the largest btc tx in history

Bitcoin risks❖ Will only be in bitcoin for 10 minutes or so!

❖ The time required to buy btc on btc-e, withdraw to bitstamp, then sell on bitstamp!

❖ Low risk here unless bitcoin price jumps drastically in ten minutes!

❖ Even on huge news bitcoin price generally changes a lot over hours/days, doesn’t tend to jump all at once like a biotech after news!

❖ This is the biggest risk though, if news were to come out the price jump would likely wipe out the arbitrage gain, and cause 1-2% in further losses. !

❖ Or could amplify the arbitrage gain by 1-2% in the opposite direction depending on the price change.

Barriers

❖ Getting EU Bank accounts!

❖ Nigh impossible due to new US regulations!

❖ Swiss even turning away their own citizens if they hold dual citizenship with US.

An Example RoundPoint Money Step Fees Time

Start point (bank

account)

$25000 Transfer via SEPA to Okpay 5 Euros 2 days

Okpay $24993 Transfer to btc-e 0% Same day

Btc-e $24993 Buy bitcoin for $452

.2% trading fee Instant

Btc-e 55.184 bitcoin

Withdraw to bitstamp

1/10 of a penny 10 minutes

Bitstamp55.184 bitcoin - 1/10 of a penny!

Sell bitcoin for $460

.2% trading fee Instant

End $25334 1.336% profit

Conclusions/Our Goals❖ Minimize holding of fiat during the middle of an arbitrage round (waiting

to buy btc due to wire)!

❖ ✓ We only transfer dollars/euros at end of arg rounds!

❖ Minimize volatility from bitcoin price gyration!

❖ ✓ Only in bitcoin for approximately 10 minutes!

❖ Minimize transaction costs!

❖ ✓ Btc-e / bitstamp pairing + SEPA is lowest tx cost arb. op. with bitcoin!

❖ Minimize time spent, less time = more rounds = more profit! !

❖ ✓ 4 days and 6 days for a round are shortest arb. ops. possible with bitcoin