Bitcoin Exchanges and Arbitrage Funds
In my opinion, one of the most promising opportunities Bitcoin this year is arbitrage. The concept is simple. Arbitrage is when you take advantage of a disparity in prices between different markets to buy at one price and instantly sell at a profit in another market.
As Bitcoin's popularity grows, so to does the number of exchanges. Prior to February 2014, when it suspended trading following a possible hack and insolvency, Mt. Gox in Tokyo had a near-monopoly on Bitcoin exchange. The market has more or less recovered, and the new exchanges that emerged in Mt. Gox's wake have had to prioritize investor trust and security.
Some popular exchanges are:
- Bitstamp
- Bitfinex
- Coinbase
- Cryptsy
- BTC-e
- Kraken
- BTCChina
- Bitcoin Source
The divergence of prices between different exchanges means that you can get involved in arbitrage yourself just by having accounts on multiple platforms, with a balance in multiple currencies in each one. When the opportunity—a difference in prices—arises you can simple buy and sell immediately without having to transfer funds between accounts.
The risk in doing this, of course, is that the price will change between when you buy and when you sell. This makes arbitrage highly dependent on the speed at which you are able to make transactions. This type of trading also requires you to sit in front of a screen watching price feeds constantly, waiting for the right moment.
Short Selling
Most currency investments are made in the hope that the value will increase over time. However, if you are one of the substantial number of people who believe that Bitcoin is over-valued and pumped up by speculators, then you can try your hand at short selling Bitcoins. Short selling allows you to profit from drops in the value of a commodity in the same way that you would profit from rising prices if you bought it.
The mechanisms of short selling vary somewhat by marketplace and local regulations, but it's normally conducted the same way. Usually, the speculator borrows stock or currency from a broker and sells it on the market with the hope that the price will go down after he or she sells the borrowed shares. If the price does go down after a certain amount of time, the investor buys the amount of shares owed to the broker at the lower price and returns them. The investor's profit is the difference between the amount the borrowed shares sold for and the price of buying them at the diminished price point.
Some Bitcoin platforms allow short selling, usually by allowing you to "borrow" the currency from other clients on a peer-to-peer network or to borrow against the platform itself. These include:
- Bitfinex
- BTC-e
- Fxopen
Some traditional trading platforms, such as Plus500, have a short selling mechanism. If you own bitcoins then you can also use this platform to hedge against loss during times of particular risk.
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