Arbitrage serves an important function in the Bitcoin economy. Thanks to the individuals and automated bots that actively look for price differences between the various Bitcoin exchanges and buy from one and sell to another if the price disparity ever becomes high enough for the transaction to be worth it, people who are buying or selling BTC for their own use can rest assured that they are paying roughly the same price no matter which exchange they go to. Arbitrage also promotes competition among exchanges; if the only people trading on exchanges were those who were actually seeking to convert their money from one currency to the other, there would not be enough volume on the smaller exchange to sustain them, and it would be very difficult for new entrants to gather up enough momentum to survive.
In an effort to make life easier for traders participating in Bitcoin arbitrage, developer Eun-Joo Hansch Seoung and her husband have developed a Bitcoin client designed specifically for the task. The idea is simple; rather than having to navigate between browser tabs and spend time copying and pasting codes and addresses across multiple websites and interfaces, almost all of the process can be done within one client which handles all of the operations automatically. The software was originally developed in late 2011 to early 2012 for the now defunct Bitcoin exchange TradeHill, but by the time the software was finished the exchange had already shut down. Hansch writes, “I really was very disappointed since I had been working for months to create a software, which was of no use any more! But I decided not to give up! I figured out the API of MtGox and reused large parts of my GUI. And now BTC-Trader is capable of using the MtGox API.” In fact, BTC Trader supports much more than MtGox; it also includes support for the BitInstant API, a BitcoinCharts overview and the ability to see market prices for all exchange for a specific currency – a view which is surprisingly missing from BitcoinCharts. If you are working in multiple currencies, BTC Trader offers a view which is missing from MtGox: the ability to see all of your balances in all of your different currencies at the same time.
As an example of what can be done, Hansch offers a video tutorial showing how the software can be used to sell 2 BTC for USD on MtGox, send those USD to BTC-E via BitInstant, and sell them back for 2.0037 BTC on BTC-E all in the space of 50 seconds.
The basic steps are simple; as Hansch writes:
- Sell Bitcoins on MtGox site to get USD funds.
- Use the USD funds on MtGox for creation of a MtGox coupon code.
- Creation of a Bitinstant quote with a mouse click.
- Execution of a Bitinstant transfer to BTC-e Bitcoin exchange.
- Checking the Bitinstant API response for retrieval of funds.
- Purchasing Bitcoins on BTC-e exchange.
With BTC-Trader you can perform step 2 to step 6 in about one minute.
The program still has shortcomings; particularly, support for exchanges other than MtGox is not fully integrated into the program, so the last step of the process of arbitrage between MtGox and BTC-E, for example, does require going directly to the BTC-E website. According to Hansch, developing support for additional exchanges will take a considerable amount of time. “The development of a BTC-e version may not take another year,” Hansch writes, “but there is still a lot of work to do.” Given the rate at which new ways of exchanging Bitcoin are appearing, BTC Trader may never be finished. However, Hansch believes that the product is ready to see the light, and is eagerly looking forward to hearing from its first new users.
Eun-Joo’s husband, Andreas, has also agreed to answer our questions about his role in the development of BTC Trader in an interview:
I heard about Bitcoin in September 2011. On the 24th of September 2011 I registered at MtGox. At first I only traded a few Bitcoins using about 200 Euro from my bank account. But after a few months I created enough profit to be independent. I promised to my wife, that I will not use more than 200 Euros. But my profit exceeded 200 Euros and I told her: Look, this money I created from nothing. I gave all the money back to our bank account, so this Bitcoin money is truly mine and I can do whatever I want to with it. I reinvested my Bitcoins and did a lot of trading. One day I had been lucky and earned about 30 BTC due to an error of a website. I tried to contact the support but didn’t get a reply, so I kept the Bitcoins. At that time this event nearly doubled my funds. Since then I developed my BTC-Trader and did a lot of trading.
Although many people are using trading bots you can still make some profit, because a human being will always be better in his analytical abilities than a trading bot, which may be faster. I see often trading bots just making a little cheaper offer, if you go down with the price. Sometimes you can chase them down to a lower price just by making very small sell offers. However if this trading bot is more intelligent, it knows that this offers better in price are just too small. So you can also figure out the behavior of a trading bot and try to trick it. For example you use a 1 BTC ask to get the bots price down. But the rest of your BTC you will sell for a higher price. The bots Bitcoins will sell faster if you managed it to get him sell his Bitcoins cheaper. But in many cases you can just trust on the market. Just sell your BTC for a high price and get some profit. This small bots will sell all their Bitcoins and the price will still go up. There is just a little patience needed.
My main strategy is the transfer of funds via Bitinstant from MtGox to BTC-e. At this Bitcoin price the difference should exceed about 0.25 USD. If so you can sell Bitcoins on MtGox, transfer the USD funds to BTC-e and buy some more Bitcoins back. With 100 BTC you can gain about 1-2 BTC per day in doing so. The most important thing is to be quick enough. While transfering the funds you are taking a risk. Selling BTC on MtGox and transferring the USD funds to BTC-e via Bitinstant takes some time. During this time other users can buy this cheap ask on BTC-e and you end up with USD and a too high price for buying back BTC. Now you have to decide if the BTC price will go up further or not. Sometimes you will do the wrong decisions. But you should keep cool then and try to keep the losses as small as possible. The shorter the time you will have to take this risk, the better. With BTC-Trader I am quicker than the user, who will try to do this process manually. This is an advantage.
It is not easy to convince users, that they should use BTC-Trader. I guess most Bitcoin users are very good at computers. Many use Linux as operating system. They only trust open source software or software they created on their own. A proprietary software for trading on MtGox faces the difficulty, that nobody will trust such kind of software. Sometimes I think it might be impossible to get money for a software users wouldn’t try even if it was for free. Today I was kind of excited about the first download of BTC-Trader. But I don’t know if this user will try it. However I will know if he will request a license.
Vitalik Buterin is a co-founder of Bitcoin Magazine who has been involved in the Bitcoin community since 2011, and has contributed to Bitcoin both as a writer and the developer of a fork of bitcoinjs-lib, pybitcointools and multisig.info, as well as one of the developers behind Egora. Now, Vitalik's primary job is as the main developer of Ethereum, a project which intends to create a next-generation smart contract and decentralized application platform that allows people to create any kind of decentralized application on top of a blockchain that can be imagined.