Arbitrage Opportunity Sizing Calculation
A back-of-envelope method to estimate whether a price discrepancy is worth chasing before committing capital.
- Difficulty
- Moderate
- Time to result
- ~days to results
- Steps
- 5
- Confidence
- 85%
In this simple mental model, Sam Bankman-Fried describes how he sized crypto arbitrage opportunities before committing any capital, a habit carried over from his time trading at Jane Street. Instead of building complex models, he multiplies the observable price spread between two exchanges by the total daily trading volume moving through them, then discounts that number by a realistic capture rate to estimate a rough daily profit ceiling. It's intentionally rough — sweeping a lot of detail under the rug — but gives a fast upper bound on whether an opportunity is worth pursuing further. This calculation was what convinced Bankman-Fried to leave his old life and pursue crypto arbitrage full time, eventually leading to Alameda Research and FTX. It's best used as a first-pass filter before diving into execution complexity.
Origin
Sam Bankman-Fried used this exact calculation after clicking through coinmarketcap.com in late 2017 and noticing large price spreads between bitcoin exchanges, which led him to leave Jane Street and found Alameda Research.
Core principles
- 01Get a rough upper bound before investing in execution
- 02Multiply spread x volume x realistic capture rate
- 03Treat the first estimate as directional, not precise
- 04Verify data quality before trusting the number
How to run it
- 1
Identify the spread
Find the price difference for the same asset across two or more exchanges.
Pro tip Check multiple exchanges, not just the two most obvious ones.
- 2
Measure total volume
Calculate the daily trading volume across the exchanges where the spread exists.
Watch out Published volume data can be inflated or poorly synchronized.
- 3
Estimate capture rate
Assume a conservative percentage of that volume you could realistically trade against (e.g., 1%).
Pro tip Start with a deliberately low, conservative percentage.
- 4
Multiply to get the ceiling
Multiply spread x volume x capture rate to get a rough potential daily profit.
Watch out This is an upper bound, not a guarantee — fees and execution frictions will eat into it.
- 5
Sanity-check against constraints
Check capital availability, transfer restrictions, and settlement speed before acting on the number.
Pro tip If the estimate still looks compelling after this filter, move fast — the opportunity may close quickly.
In the wild
Using this sizing method, Bankman-Fried's team identified a 5-20% spread between Japanese and US bitcoin prices in early 2018, requiring buying bitcoin in the US, sending it to Japan, selling it higher, then wiring yen back into dollars.
→ The trade generated roughly $1 million per day during the few weeks it took to operationalize, before capital was fully scaled and the spread disappeared.
Common mistakes
Ignoring Capital Constraints
Alameda scaled up its capital base right as the Japan arbitrage opportunity disappeared, missing the chance to capture the trade's biggest potential returns.
Trusting Imperfect Exchange Data
Public price data doesn't always price assets like tether correctly, which can make an opportunity look bigger or smaller than it truly is.
Is it for you?
Not ideal for
Situations where you cannot verify data quality or where execution frictions are unknown and likely large.
From the transcript
“you take the the difference in pricing between major exchanges right that's like the amount maybe you could make on each trade um you multiply…”
From the episode
FTX (with Sam Bankman-Fried & Mario Gabriele)