Can you make money from Bitcoin?
As I mentioned in my previous blog post, when I try to fully understand a new technology, I like to explore multiple aspects of it. Sometime I’m lucky and I end up making some money while learning (if only college was like that…). In this post I will show you how to easily make some extra money or increase your Bitcoin stash by spending only a few minutes a day and with a few mouse clicks. I promise to spill some of my numbers before the end of this post 😉
One thing that always fascinates me is finding arbitrage opportunity and with Bitcoin there are a few points that are fairly easy to exploit one. The most visible one is the price difference between different Bitcoin exchanges; for instance as I’m writing this blog post, Bitcoin is exchanged on Mt.Gox against the Dollar for $110 more than on BTC-e.
Another arbitrage opportunity, which I experimented in the past few days and that I’ll explain in this post, is taking advantage of the Bitcoin price on Coinbase and what you can sell those bitcoins for on LocalBitcoins. Coinbase is probably the easiest site to purchase bitcoins and LocalBitcoins is a platform that allows users to sell and buy bitcoins between each other with cash or other payment systems. Basically we’ll try running a currency exchange service.
To start you need to create an account Coinbase. It’s very easy, and once setup with your bank account info, you’ll be able to purchase bitcoins in a click.One interesting feature of Coinbase is that, once you verify your identity and complete a purchase, it allows you to buy bitcoins instantly. Initially the instant buy limit is very low (0.1BTC) but after 30 days you’ll be bumped to 1BTC.
You can start by buying even a small amount like $100 or less, this is just to get the verification process started.
LocalBitcoins is where we’ll create an ad to sell our bitcoins and to do so you’ll need an account. Once created, visit the wallet page on LocalBitcoins, copy the address, and send your bitcoins from Coinbase to that address (how to send money from Coinbase).
STEP 3 – Create a bitcoin trade advertisement
You can do this right away or wait until you have been verified by Coinbase. On LocalBitcoins, click “post a trade” in the menu. The form is pretty self-explanatory, but there are a few suggestions:
- Payment method: I did my experiment using cash deposit. It’s very safe and deposits show up instantly on your account
- Premium: the easiest way to set your price automatically based on a Bitcoin exchange is to use this field. For instance if you put 5%, your price will be set at 5% more the current exchange rate on Bitstamp. If you decide to use this I suggest you to stay around 5% premium.
- Price equation: this is what I used to set my price. I experimented with a few formulas and I think the one that performed best was (mtgoxusd+bitstampusd+btceusd)/3*1.02 (2% premium over the average of the exchange rate of Mt.Gox, Bitstamp and BTC-e). Your goal is to sell at least 5% more than the exchange rate on Coinbase, since by doing so you’d have a ~3% net profit (both Coinbase and LocalBitcoins have a 1% transaction fee).
- Min. amount: I’d set this at least $100 to avoid small wasting time transactions. I ended up setting my at $300 but at the beginning you’ll need those $100 transaction to build a positive history.
STEP 4 – Start exchanging
Assuming that you’ve already been fully verified by Coinbase, now you can just wait for people to contact you on LocalBitcoins. The way LocalBitcoins work is by escrowing the amount of BTC requested by your buyers from your LocalBitcoins wallet. Once you see the deposit appear on your bank account you can release the escrowed bitcoins by clicking the release button. What I usually did was to immediately contact the buyer, to make sure it was serious about making the purchase and then buy the equivalent amount of dollars requested in bitcoins from Coinbase. If instead of growing your stash of bitcoins you prefer earning some old fashion dollars, simply buy the same amount of bitcoins escrowed and keep the difference.
Since now you can buy up to 1BTC instantly, even if you only originally owned 0.1BTC, you could trade that 0.1BTC over and over again without actually speeding a dime more. To give you an example, if you originally bought 0.1BTC and you trade your entire wallet 10 times at with a 5% premium, you’ll be doubling your initial investment in 2.5 days.
Final notes
This type of exchanges won’t make you rich, but they could easily generate a few hundred dollars every week. Using this process I was able to grow my (small) Bitcoin stash of about 10% daily. While I haven’t of course accepted all the requests, I received enough trade requests to exchange even $10, 000/day, so there’s definitely a huge demand.
Try to keep your margin smaller at the beginning (but keep in mind that 2% of the transaction will go towards transaction fees) to create a positive history and start accumulate positive ratings. People will be willing to pay a higher premium if they know they can trust the seller.
One thing one needs to pay attention to is the price trend of Bitcoin, since during a meteoritic rise of the price, even few minutes delay in buying back the coins could mean losing all the margin (or more). It’s actually easier to make money on down trends since often a few minutes delay will increase the spread between your LocalBitcoins exchange and Coinbase exchange.
You can try other payment methods other than cash deposit but beware that Paypal, Chase Quickpay, Venmo and other services allow chargebacks and are often use to scam Bitcoin sellers. LocalBitcoins does a great job in explaining all the different methods and their risk level.
DisclaimerIf you plan to this consistently and with a volume superior to $1000/day, make sure to register as a money business service and follow all the given regulations.
