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My Crypto Investment Plan - Arbitrage

If you deal with cryptos, you are likely wondering how you can increase your holdings. I have been experimenting for many months now with different methods, as well as following what others have. What I am going to do through this article is go over something called “arbitrage.” This is essentially the act of taking advantage of price differences between two markets. So let us get started!

Understanding Values of Cryptos

The first thing you have to do is understand how cryptos are valued. This was very confusing to me in the beginning, when I saw listings of Bitcoins at many different values. I had no idea what was going on, and it is one of the reasons why I was such a late joiner. Well, it really is not that hard to understand when it gets down to it!

The best way to think of this is as being like separate markets. Each exchange is its very own market, like a country. In one country toilet paper may be worth $1 a roll, while in another it could be $10. In the same sense, in one exchange Bitcoin can be worth $1 and in another it could be $10. This is because of the different values the members of the exchange put on them. In arbitrage terms, we could then buy the $1 Bitcoins and take them to the other exchange and sell them back at $10, then take that money back and keep doing that cycle over and over. This is how the markets end up going through their correction (where you will find that one market will lag behind the rest and will end up getting caught up).

Keeping Up With Markets

To make this work well, you need to keep up with different markets. Just as a short view, if we look at BTC-e and Coinbase, they have different prices on their Bitcoin. They are as follows:

  • BTC-e: $734
  • Coinbase: $736.34

Now, this is a difference of $2.34, or 0.3%. In this case, it is not worth getting involved, but we will look at that in the next section. For now, just understand that the prices are always fluctuating, and if you check now and then again in a couple minutes, you could see vast differences in them. This is why it is important to be proactive, rather than reactive if you want this to work.

While the difference between the offer to buy and the offers to sell may be small sometimes, they can also be large in others. Even on the same exchange, you can often play between the two to help build up your holdings significantly. Essentially the more volatile a coin is, the bigger the chance is of being able to earn some money off playing it. At the same time, however, it also increases the chances that you can lose absolutely everything by trying it. It is all a gamble, and depending on how you feel about a specific coin you may or may not want to get involved. As a direct example of this, we can look at Dogecoin. At one point this was dropping to the point where most of us thought it was going to completely crash and burn. It got down to where it had almost no value at all, and why should it have any, when they are pumped out at a fast rate, it does not bring anything new to the table, and seems to play on a meme? But then it shot up in value, increasing by around 15 to 20x its lowest rate. Having jumped on that boat right there at the bottom (or really any time in between the high and the low) could have netted some serious money on the coins. But then again, who knew it was going to shoot up like it did? Just like some people undoubtedly made some nice cash, they could have just as easily lost everything.

Determining Value

A mistake a lot of people seem to make is not paying attention to their costs for doing arbitrage. In the above case, we have our difference of $2.34. That looks awesome. If you sell 1000 Bitcoins, that is an easy profit of $2340, right? Well, not exactly. If we notice, the difference in price is only 0.3%. In most exchanges, the cost of doing a trade will be at least 0.2%. In the case of Coinbase, the conversion is also 1% on top of that. This means you would actually lose 0.9%, or around $7000 on the 1000 coin trade. It is very easy to get caught up in this, so you want to ensure you are keeping up with the percent difference and comparing it to what you have to pay to make the trades happen. Generally, I will only do arbitrage if I am going to make 5% or more. This can lead to an increase of only a couple percent, but when it really comes down to it anything is better than nothing. Along with this, it allows for playing it safe, so to speak.

Understanding Transaction Speed

Something a lot of people seem to ignore is that different coins take different amounts of time to get transferred from one wallet to another. This also means that they take different amounts of time to make it to an exchange. This is very important to realize because it means you might be making a transfer for an awesome arbitrage opportunity, only to be shot down by making it too late. Worldcoin, for example, is very fast. You can send a transaction and have it hit your exchange account, generally, within a minute or so. On the other hand, we have Bitcoin and Devcoin, both of which can take an hour or longer depending on how long it takes for blocks to be found (at an average rate of a block per ten minutes, we can assume that there are periods where it will take a lot longer). So while you may have just found this awesome arbitrage opportunity with Devcoin, you may not be able to make it in time.

This also leads itself to another problem, which is that you can assume that other people are always working on the same arbitrage opportunity that you are. For example, if there is a split of 10% or more and you are fairly certain that the price is going to be going back up, you can guess that others are in the same boat and are in the process of doing what it takes to get their funds to the exchange to take advantage of this. To help beat this, though, there is a trick. This is to convert your coins to a faster one prior to moving from one exchange to another.

Let us take Litecoin, for example. Generally speaking, it will run around a certain value (say 0.027 BTC). If we need to move Bitcoins from one exchange to another, we can trade on the current exchange for Litecoins, take them to the other exchange and turn them back in to Bitcoins again. Sometimes this will lead to a loss of around a percent or so (which can be greater if you are not careful, so still keep up with what you are doing and do not do it blindly) but if you are working on an awesome arbing chance, this is often times well worth it. Getting your coins to the exchange before anyone else means you get first dibs while they are sitting around wishing blocks were being solved, meaning you get the biggest benefit.

Best Coins for Arbitrage

The best coins for arbitrage are those that are going through some volatile movement. I genuinely believe that Devcoin is awesome for this, and I would loop Dogecoin in on this as well. Both of these are at the 100 satoshi or so level, which means an increase of just a single satoshi is a minimum of 1% (which should cover more than the fees of doing the arbitrage). As we get up to more and more expensive coins, the difference starts to change, and the value of doing the exchanges starts to dwindle off to the point where you make nothing or lose money in the process. And, as the value of coins goes down the profit goes up for each satoshi they increase by.

Being Careful

Only risk what you can absolutely lose, and keep up with the news on coins before making any decisions. A lot of the big volatile swings are due to new information being released. When WDC had Scharmbeck announced, for example, its price rose considerably. It is things like this that can help out; had you know about this prior to the public announcement, you could have stocked up on them and sold them for massive profit. Or, if you read about it and analyzed it right after it did go public, you could have ridden the train up, using arbitrage as a profit generator the entire way! More or less, the more you know the better off you are going to be. But with that said, there are still no guarantees. You could absolutely still lose everything, even if awesome news came out. Or you could become rich. It is all part of the game!

Conclusion

Arbitrage is an awesome method for increasing your coins, and it can even be used to increase your fiat wealth. If you have a lot of time to deal with watching the markets and keeping up with the latest crypto news, you can make the system work for you. All it takes is patience, persistence and the ability (and willingness) to analyze what is happening around you. But always keep in mind to watch how much you are investing! Treat investments like gambling; while you can win, you can also lose. Be safe!

Investing


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