Just as one can buy traditional commodities on several different exchanges in several different countries, and there can sometimes be price differences between these exchanges, there are also multiple Bitcoin exchanges and there can be price differences between them. Arbitrage players take advantage of price differences to buy commodities in markets where there are surpluses and to sell commodities in markets where there are shortages. Similar opportunities exist in the Bitcoin markets. You wouldn’t expect that to happen with a digital product, but where the rubber really meets the road, there are external factors. Most obviously, different exchanges in different countries operate in different fiat currencies, so for example, when we compare the price of Bitcoin in US dollars between a Canada-based exchange and a Hong Kong-based exchange, some of the difference it is due to the friction of exchange between these various local currencies.

Let’s consider a concrete example. You are a Canadian who has been investigated by a Canadian Bitcoin exchange under Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures, and opened an account and deposited Canadian dollars. You wait for the price of Bitcoin to drop and then you make your purchase. Days or weeks later, the price hasn’t moved much, but notice some appreciation on a particular Hong Kong-based exchange; there, its price has gone up 10% since you bought it. Transferring Bitcoin from one wallet to another is cheap or even free if you’re not in a hurry, so it’s very simple to move your Bitcoin to a wallet on that exchange, or would be if you had a wallet on that exchange. Opening a wallet on that exchange is a hurdle, but minor, and an hour later, you sell those Bitcoins. Now what? You have a balance of Hong Kong dollars left on a Hong Kong-based Bitcoin exchange. This is where the obstacles get bigger; you will likely have to go through KYC and AML processes before you can get that fiat currency off the Hong Kong exchange, and even then how will you do it? Will they mail you a check? Will they transfer it to your Canadian bank? How much do you charge for fiat withdrawals? What will your Canadian bank do with those Hong Kong dollars? Will they exchange them for Canadian dollars? At what exchange rate? What rates? What are its tax implications? That 10% appreciation in a foreign currency suddenly doesn’t seem like a windfall.

These costs and problems are the friction that creates some of these imbalances. If the Indians are having a buying spree, driving up the price of Bitcoin on their local exchanges, it may be challenging for people selling Bitcoin in other currencies to capitalize on the arbitrage opportunity. It’s not insurmountable, though, and there are rewards for people who can figure out how to do it cheaply. Travelers who bank in multiple countries and need multiple currencies, for example, could save on these frictional costs.

We find the same type of opportunities available in Bitcoin mining. Mining with any hope of generating income consumes tons of energy, so much so that it costs most people more than it generates. However, if you live in a situation where energy is free (eg Venezuela), cheap (eg solar or wind), or where thermal output from mining can offset your costs of heating, mining may be profitable.

The common thread in these opportunities is that your success requires you to find and fill a niche: address an unmet need. Mine to speed up transactions for others when you have an economic advantage to do so. Trade to provide liquidity to others who cannot move capital between currencies as easily as you. It is by doing these things for others that you are rewarded.