The very large spreads you see here are (usually) caused by some unexpected interruption to the usual stream of arbitrage trades. These unexpected interruptions could be anything from a temporary wallet maintenance to an overloaded exchange not accepting trades for a few minutes to people fleeing an exchange due to insolvency (mt gox). If everything is working correctly, then we might get a wonderful situation where users on one exchange are just going nuts for buying a specific crypto, and then it can be very profitable but also usually short lasting. One example of this was the recent run-up of LTC's price.
When things are running "normally" the arb space is pretty crowded especially amongst crypto-crypto pairs. Things like BTC-USD arbitrage between a USA exchange like GDAX and a Korean exchange are more of a regulatory arbitrage than a trading arbitrage (it takes a lot of work to get set up to trade and withdraw money from Korea to the USA to balance the sell-leg of the arb), so I would ignore those as they are really out of the scope of a HN tech discussion.
I think this site has come up before and I might have commented on it. If you are seeing these spreads and thinking about quitting your day job, don't.
Source: I did quit my day job and paired arbs like this account for about 0% of trading volume we do.
Shameless plug: if you are interested in this stuff feel free to contact me, info should be in my profile.
I saw some blogs theorize that nefarious bots are also increasing apparent spread—e.g. painting the tape on gdax to skim from coinbase cash whales—and so little of the everyday trading activity is human, that if you try to arb it, all of a sudden the spread disappears. It even makes sense that the entity responsible for this website is trying to combat effects like this by driving the spread down. What reasons can you think of for someone to make this website?
GDAX bot activity is all: speculative automated trading, arbitrage, or (and most importantly) coinbase's own activity on the gdax exchange. They have to fill orders for all their customers clicking the buy button on their iphone apps. 100k new customers A DAY were seen at bitstamp, the coinbase app was the #1 app in the appstore, that is a lot of retail buying activity. Those buys are then passed to traders / bots that fill them on the exchange so I get that it looks automated and one-sided.
"if you try to arb it, all of a sudden the spread disappears" - well there's a lot of people trying to do the same thing because they think it is easy money and no one has thought of this great idea of buying LTC on one exchange and selling on GDAX, so when your incoming transfer of LTC completes so do a bunch of other transfers all doing the same arb trade (and those are automated and will beat you in the race).
The blogs you are referring to I do not hold in high esteem. I maintain high levels of doubt about exchanges as a whole and realize the extremely high counterparty risk more than most in the space, but their ideas about painting the tape and nefarious bots are misguided at best.
Most of the reason for the spreads is counterparty risk. So you might have a lot of trouble getting your money out of the exchange or the exchange might go completely under.
You are correct--there is no such thing as "risk free". By convention, we mark our zero point at the risk of sovereign bonds. It is the smallest risk everyone in our economy agrees on a level for. It still contains "risk". But it's a convenient--and practical--reference point.
The analog in Bitcoin would be getting your transaction committed to the blockchain. It's still "risky". (Quantum computers could break the encryption!) But it's a convenient--and practical--zero. (You'll notice the advantage of a currency backed by a debt-like obligation. Interest rates come as a first-class function. There is no "risk free" borrowing rate in Bitcoin.)
Between these zeros, an arbitrage would require, simultaneously, committed transactions on the Bitcoin ledger and immediately-available funds in an FDIC-insured (or analogous, e.g. SIPC) account. That is not something exchange-based trading, which involves depositing U.S. dollars and/or Bitcoins with the exchange in exchange for an IOU, permits.
For whatever reason I always get too tempted and have to jump into these crypto-arbitrage posts that appear on here about twice a month.
This is by far the most informed reply I've seen in all those threads I've read.
Especially wanted to highlight the last two sentences: there is no way to do risk-free arb in crypto due to counter party risk with exchanges. Even if it might seem small, it isn't small! The opportunity size, scale, roi, etc need to outweigh that risk and (despite playing in this sandbox which I guess makes me a hypocrite but w/e, just trying to help...) I don't think it is worth it right now.
That’s actually a bit of a loaded argument... we assert that all arbitrage profit must be at least counterbalanced by various kinds of risk (including liquidity risk, counterparts risk, & cetera) because we're assuming that we're operating in an efficient market. We should actually reason the opposite way around: analytically evaluate all sources of risk, compare it to the expected profit, and if the latter is no greater than the former, deduce that we are in an efficient market.
> we're assuming that we're operating in an efficient market
Arbitrage is, by definition, the refutation of a strong-form efficient market [1].
> liquidity risk, counterparts risk
The presence of these risks betrays the absence of a true arbitrage. A pure arbitrage involves simultaneous execution, thereby negating liquidity risk. It also involves instantaneous settlement, thereby negating counterparty risk. In the real world, I've only seen it in specialized real-time foreign exchange and money markets.
The risk you can't get rid of is the "risk-free" risk. If the U.S. government blows up, you will not make money on your triangular arbitrage [2].
> analytically evaluate all sources of risk, compare it to the expected profit, and if the latter is no greater than the former, deduce that we are in an efficient market
This is an interesting area of theoretical finance [3]. It is practically useless. There is no list of "all sources of risk," much less any way to price it.
You don't get killed by transaction fees. Some exchanges have withdraw limits. Some exchanges have withdraw fees (but they are flat). Your market/limit orders may also have fees, percentage fees, so those are to look out for, but when arbitrage opportunities are around the 5% range, it's moot. I think what kills you is the time that it takes to balance your accounts between exchanges. You can make one arbitrage execution, and have to wait 30 minutes up to an entire day, before you can rinse and repeat, assuming the spread still exists by then. Scripts should really help here.
When things are running "normally" the arb space is pretty crowded especially amongst crypto-crypto pairs. Things like BTC-USD arbitrage between a USA exchange like GDAX and a Korean exchange are more of a regulatory arbitrage than a trading arbitrage (it takes a lot of work to get set up to trade and withdraw money from Korea to the USA to balance the sell-leg of the arb), so I would ignore those as they are really out of the scope of a HN tech discussion.
I think this site has come up before and I might have commented on it. If you are seeing these spreads and thinking about quitting your day job, don't.
Source: I did quit my day job and paired arbs like this account for about 0% of trading volume we do.
Shameless plug: if you are interested in this stuff feel free to contact me, info should be in my profile.