Is this actually feasible to make money or will you still get killed on transaction fees?
When things are running "normally" the arb space is pretty crowded especially amongst crypto-crypto pairs. Things like BTC-USD arbitrage between a USA exchange like GDAX and a Korean exchange are more of a regulatory arbitrage than a trading arbitrage (it takes a lot of work to get set up to trade and withdraw money from Korea to the USA to balance the sell-leg of the arb), so I would ignore those as they are really out of the scope of a HN tech discussion.
I think this site has come up before and I might have commented on it. If you are seeing these spreads and thinking about quitting your day job, don't.
Source: I did quit my day job and paired arbs like this account for about 0% of trading volume we do.
Shameless plug: if you are interested in this stuff feel free to contact me, info should be in my profile.
"if you try to arb it, all of a sudden the spread disappears" - well there's a lot of people trying to do the same thing because they think it is easy money and no one has thought of this great idea of buying LTC on one exchange and selling on GDAX, so when your incoming transfer of LTC completes so do a bunch of other transfers all doing the same arb trade (and those are automated and will beat you in the race).
The blogs you are referring to I do not hold in high esteem. I maintain high levels of doubt about exchanges as a whole and realize the extremely high counterparty risk more than most in the space, but their ideas about painting the tape and nefarious bots are misguided at best.
This "arbitrage" is a classic picking-up-nickels-in-front-of-steamrollers trade.
You are correct--there is no such thing as "risk free". By convention, we mark our zero point at the risk of sovereign bonds. It is the smallest risk everyone in our economy agrees on a level for. It still contains "risk". But it's a convenient--and practical--reference point.
The analog in Bitcoin would be getting your transaction committed to the blockchain. It's still "risky". (Quantum computers could break the encryption!) But it's a convenient--and practical--zero. (You'll notice the advantage of a currency backed by a debt-like obligation. Interest rates come as a first-class function. There is no "risk free" borrowing rate in Bitcoin.)
Between these zeros, an arbitrage would require, simultaneously, committed transactions on the Bitcoin ledger and immediately-available funds in an FDIC-insured (or analogous, e.g. SIPC) account. That is not something exchange-based trading, which involves depositing U.S. dollars and/or Bitcoins with the exchange in exchange for an IOU, permits.
This is by far the most informed reply I've seen in all those threads I've read.
Especially wanted to highlight the last two sentences: there is no way to do risk-free arb in crypto due to counter party risk with exchanges. Even if it might seem small, it isn't small! The opportunity size, scale, roi, etc need to outweigh that risk and (despite playing in this sandbox which I guess makes me a hypocrite but w/e, just trying to help...) I don't think it is worth it right now.
Arbitrage is, by definition, the refutation of a strong-form efficient market [1].
> liquidity risk, counterparts risk
The presence of these risks betrays the absence of a true arbitrage. A pure arbitrage involves simultaneous execution, thereby negating liquidity risk. It also involves instantaneous settlement, thereby negating counterparty risk. In the real world, I've only seen it in specialized real-time foreign exchange and money markets.
The risk you can't get rid of is the "risk-free" risk. If the U.S. government blows up, you will not make money on your triangular arbitrage [2].
> analytically evaluate all sources of risk, compare it to the expected profit, and if the latter is no greater than the former, deduce that we are in an efficient market
This is an interesting area of theoretical finance [3]. It is practically useless. There is no list of "all sources of risk," much less any way to price it.
[1] https://www.investopedia.com/terms/s/strongform.asp
Incidentally, [3] is very close to my field of research back when I was doing postgraduate studies in economics, but as you mention, it has close to zero applicability.
Wrote about the math here - https://steemit.com/arbitrage/@kesor/the-math-behind-cross-e...