Bitcoin trading is one of the places where arbitrage is still fairly simple.
Arbitrage in Bitcoin means taking advantage of real time price differences across exchanges. The easiest way to see how it works is Coindesk price chart. There are several exchanges in it. If you take a good look you will see the price is not the same at all of them. The difference gets bigger when a rally is on.
This happens because of the still low number of people trading. The market gets split even further for every exchange which means the price will fluctuate differently at each of them.
And yes, you can buy Bitcoin cheap at one exchange (it would be most likely BTC-E) and sell it on another exchange (maybe Bitstamp). The difference can be around $10 at a rally nowadays, so pick up the free money while it is still possible.
There used to be a guide written up on a now defunct site, people were talking about it on bitcointalk as well. The basic gist is you want to keep your cash where it has more value (where Bitcoin is cheaper) and you want to keep your Bitcoin where it has more value (where it is more expensive).
The caveat is if you rely on moving Bitcoin around you might lose opportunities because the confirmations take some time. Some exchanges require 6 confirmations â€“ it will take way too long.
The way around this is selling Bitcoin expensive at place A and buying it cheap at place B at the same time. Then you wait until the prices get equal on both A and B. Once that happens you buy the same amount where you sold before and sell the same amount where you bought before.
This way you profit and still keep fiat money where it has more value and Bitcoin where it has more value.
But you are kind of relying on other arbers (or fate) to work for you and make the prices between A and B equal.
Different prices at different exchanges are no magic behind it, usually it is more expensive to get fiat in or out of places that have lower price per bitcoin - see here for BTC-e. The situation that makes it work quite reliably is a rapid price action followed by consolidation: peaks of pumps will see higher price difference, consolidation will lower the difference down.
How it works when it works:
|Exchange A||Exchange B|
|Sell 1 for $400||Buy 1 for $390|
|Buy 1 for $399||Sell 1 for $398|
|$1, 1 BTC||$408|
Fees are not included here but you get the idea.
It is a usual speculation on future, only with a twist that will make sure you don't run out of Bitcoin on an exchange where Bitcoin has better value.
What are you risking
There are situations where high premium remains stable on a bitcoin exchange through days and days and seemingly nobody is arbing it. The reason for it could be that the price is too volatile and rapid movements would wipe out the arbitrage gains. Another thing is counterparty risk - if every year an exchange gets hacked it is something that traders cannot consider a marginal risk. Bitcoin arbitrage from one point of view means risking 10K USD to make 10 bucks.
Bots to sniff arbitrage opportunity
You see it is not easy to get into this way of thinking. You can set up a bot to sniff the opportunity and even do the trade for you. Don't use a bot as a black box though. Really don't.
The app let’s you choose exchanges you want to monitor. It then creates pairs of exchanges where the price is different. Clicking on each pair you will get the spread development over time (tab â€Deltaâ€) or the two BTCUSD price lines plotted into a single chart.
Automated trading: Arbitrage Bots
See Bitcoin automated trading. To code your own arbitrage bot is not as difficult as to write a trading bot - with arbitrage you don’t really need technical analysis and indicators.
If you want to buy a bot, you can either buy a strategy or a programmable bot like HaasBot.
Altcoins cost fraction of Bitcoin, you are rich man in altcoin space with one Bitcoin.
Since you are able to buy large amount of altcoin, every little price different can give you a big profit.
Consider it. More on altcoin arbitrage