- Cryptocurrencies can have price differences of up to 5% across different exchanges, making them ripe for arbitrage.
- US startup Arbitraj has developed price comparison tools and is working on a trading tool to take advantage of the spreads.
- Cofounder Jason Flack says hedge funds have approached him about using the tools.
A small US startup is working on a set of tools to take advantage of the arbitrage opportunity offered between cryptocurrency exchanges, highlighting not only the immature nature of the sector but also the opportunity to make big money in the emerging space.
Arbitraj LLC has built a tool to allow people to compare price spreads of cryptocurrency exchanges and is working on a trading tool to take advantage of them. The early-stage company, whose staff still work 9-to-5 jobs, has been approached by hedge funds keen to take advantage of the opportunity.
The crypto arbitrage trade
In most developed markets, assets will be priced the same across different exchanges. Any pricing imbalances present one of finances golden opportunities: arbitrage. This is where a trader buys an asset – say a stock – on the exchange where it is cheaper, turns around to sell it on the exchange that quotes a higher price, and pockets the difference. It is an easy way to make money.
For currencies, stocks, and other mainstream assets, even the smallest arbitrage opportunity is quickly eroded. When traders buy the cheaper asset, the added demand drives up the price until the price spread is eroded.
But even some of the most liquid cryptocurrencies such as bitcoin can have price spreads of up to 10% across different exchanges due to the difference in demand, a lack of pricing regulation, and difficulties trading between some exchanges.
Toby Allen, a partner at Chicago-based Akuna Capital, told Business Insider last December: “There is sometimes 10% exchange arbitrage. As a trader, it is such an amazingly fun space to be in compared to traditional assets because of the spreads and technology gaps.”
LA-based Jason Flack, a venture debt investor who developed the Arbitraj apps, told Business Insider: “In order to drive more volume to an exchange, you might price your assets a little bit cheaper.
“You’ll see the ones in South Korea, they are charging premiums on their bitcoins because there’s so much demand. They can’t access Coinbase, they can’t access Bittrex, they can’t access any of these US exchanges.”
It’s not just friction between markets that create pricing imbalances.
“There are very big spreads just between US-based and non-Korean exchanges,” Flack said. “5% spread is massive in any other industry. For crypto, the reason we might say it’s small is because it used to be 30%. If you talk to anyone in the forex space, 5% is insane, it’s unheard of.”
‘The next 18 to 24 months you’re still going to see this massive spreads’
Arbitraj has built a web app and Google Chrome plug-in that it shows the price spreads for cryptocurrencies such as bitcoin when users are browsing exchanges.
The company, which has 6 part-time staff, has been trialing its app with a group of around 500 “beta” users. It is also working on a transaction platform to allow people to take advantage of the pricing differences rather than just see the spreads.
“It works right now, basically we’re just adding more exchanges,” Flack said. “In the platform, we actually calculate the subtraction cost subtracted from the percentage spread that you’re going to receive.”
Arbitraj originally intended to make the platform public but Flack said: “For arbitrage, it’s a little bit hard because if everyone is making the same trades then the spreads go away. We’ve leaned back towards using it privately.”
Flack said they had been approached by hedge funds interested in using the tool and said: “We told them we’d reach out when we have something [more developed].”
Flack added that he does not think the arbitrage opportunity will be around forever.
“The market is definitely not evolved yet,” he said. “The next 18 to 24 months, I’d say you’re still going to see this massive spreads. Once regulations start to evolve, you’re going to see that even out”