Others here are missing the point. Until platforms like Bitfinex allowed margin trading, arbitrage was impossible because the exchanges are extremely risk averse. In order to arbitrage you would have had to buy on one exchange, then wait for 3 confirmations (~40 minutes?) before the receiving exchange would take the risk that the bitcoin was actually transferred. Now with short selling it looks like you can instantly borrow a bitcoin on the exchange that's inflated, then sell it immediately. You don't need to transfer between exchanges - all done completely on internal paper transfers inside the exchange.
I don't see how confirmations come into it. To arbitrage between exchanges, you own some bitcoins and dollars (or other national currency) in both exchanges. Then when an arbitrage opportunity arrives, you sell on the high one and buy on the low one. If long term your accounts are unbalanced, you can withdraw/deposit, but speed isn't required for that.
People weren't doing that because they weren't capitalized or there were barriers to becoming capitalized in the other country. Like there was no way to send national currency to the exchange in the other country because you couldn't get a bank account in the other country. But it was possible to send bitcoin to the exchange in the other country.
So people would create a routine circuit where they have dollars, buy bitcoin on US exchange. Send bitcoin to foreign exchange, sell bitcoin for that national currency (sometimes dollars). If possible, that exchange would allow wiring out, back to the user's real bank account. In other cases that exchange would have a bitcoin or national currency market of another cryptocurrency, like litecoin, where an arbitrage opportunity MIGHT still persist.
The litecoin would be moved and liquidated back on a US exchange.
Got to calculate it yourself and figure out why the arbitrage opportunity is still there. Usually there's a good reason. Sometimes there's a good reason that you are exempt from, and in those moments you borrow as much as a can get your hands on and make 5% profits as much as possible.
I came to the comment section to find out exactly how were they getting over the confirmation time, and I was not disappointed. Thank you greenleafjacob. The article should have mentioned this.
If you can immediately buy and sell between exchanges it should quickly level the prices. Something like that is easy to automate, so any slight margin that appears will be almost instantly leveled.
Any self-respecting BTC bear isn't going to short on an unregulated platform run by people heavily invested in BTC being a success and expect to see their margin again or get paid out on their contract if they're right. I mean, it's not as if exchanges have a good track record of not losing/stealing customers' money when BTC is doing well.
> Now with short selling it looks like you can instantly borrow a bitcoin on the exchange that's inflated, then sell it immediately
This sounds more like speculation than arbitrate. With arbitrage, you transfer liquidity from one exchange to another by having a short leg on the higher-price exchange and a long leg on the lower price one. This is great for Bitcoin because it evens out the price differences between the exchanges, and at the same time transfers the liquidity of one exchange to another one, while the arbitrageur makes a profit.
I don't see how leveraged trading can replace this. Arbitrate is, essentially, taking orders from one exchange and selling them on another one, thereby matching a buyer and a seller on separate exchanges. It's a genuine service to the market.
Leverage does the same because the counter-party wouldn't be able to tell the difference on whether you used your own or borrowed bitcoin and hence the effect is the same.
I see your point now. I guess it all comes down to whether the arbitrageur is willing to take the risk of not being able to cash out bitcoins on the leveraged exchange. Leverage certainly increases the risk of not being able to withdraw, and often when you need it the most.
I have been doing bitcoin arbitrage for a while with https://github.com/butor/blackbird/ . The project seems to have gotten some more attention recently for what ever reason.
Yep, plus arbitrage isn't "taking over", no more than "retail is taking over the manufacturing". It's just a characteristic of healthy stock exchanges.
Is there a cap on the growth of the blockchain? Since every transaction is saved and every actor has all of the blockchain (Am I correct?), if HFT made it double it size every week, will it reach an unmanageable size after a few terabytes?
This was evident on Coinbase a couple of years ago. You could sit there and watch the bids and asks move up and down in a regular fashion on a Saturday night. Probably super amateur HFT but HFT nonetheless.
They aren't trading possession on the blockchain in most cases. Generally, the BTC is in an exchange's wallet and the exchange maintains the accounts of the traders until the traders withdraw their assets.
edit: Some cross exchange trades (i.e. buy BTC on one exchange and sell on another) would still require a move across the chain, but it all really depends on what the exact mechanics of the trade are.
Note: the article confuses two distinct things wth each other, or at least makes it unclear: the transaction volume that is allegedly dominated by high-speed traders is in the forex market, with people trading a promise to e.g. USD, EUR and Yuan for a promise to bitcoins.
Only when someone withdraws his Bitcoin promise does it become a transaction on the blockchain. Until then it's just an exchange saying it owes you a certain amount of bitcoins. This becomes evident when an exchange defaults on this promise because of e.g. a hack, as has been the case with Mt. Gox, Bitfinex, Bitfloor and many others.
> while the increasing dominance of sophisticated traders begs the question of how long the juiciest arbitrage opportunities will last.
Raises the question, not begs it. Begging the question would be to say, 'Bitcoin always generates profit, therefor it will always generate a profit.' Begging the question is assuming the consequent of the argument; raising a question is, well … raising one.
There's no objective standard for language usage, so it's perfectly possible for something to mean one thing in technical jargon of a specific field, and something else in colloquial usage.
Therefore, your claim that "begs the question" can't mean what 99% of people understand it to mean in colloquial conversation because it's a term of art that means something else in logic/rhetoric is invalid.
By the way, this reasoning is independent of etymology. "Beg the question" may at some point have only meant what you claim it means now (I don't know if it did or not) -- but that doesn't change anything, even if it's the case.
I have, in nearly 35 years of using English, come across exactly 1 "correct" usage of "begs the question" outside of comments like yours correcting people.
In other words: You're fighting a lost battle. I suspect if you put the two common uses of it to a representative sample of people, that the majority won't even know the original usage at this point.
Just like high frequency trading in the gold market doesn't require physically handing bars of gold for physical dollar bills at high speed, neither does high frequency trading bitcoin require any high speed blockchain transactions.
I don't think there's a specific frequency that qualifies as "high." All the qualities of hft stay the same so long as you are fast relative to "normal."
reply