[Cryptocurrency Triangular Arbitrage]-Steemit Crypto Academy | S4W4 | Homework Post for @reddileep
I am happy to be here again for another assignment,
1-Define Arbitrage Trading in your own words.
The ability for investors to buy and sell financial instruments in every part of the world has made the financial markets to be more connected strongly, due to the help of the internet and a phone or a laptop you can access the market from anywhere and anytime. So, today, we will be looking at a way of reducing risk to make more profit.
This process is called Arbitrage trading. Let's discuss Arbitrage Trading. Arbitrage is the process of simultaneously buying and selling assets to profit from the difference in the price of the assets. A person that indulges in the type of trading is called an Arbitrageur. What the Arbitrageur does, is to find a financial instrument that has differences in the price indifference markets, then he will buy at a lower rate from one market and simultaneously sells that same financial instrument at a higher rate at another market, thereby making a profit from the difference between the two markets.
For example, there are two markets in a particular country, Market 1 and market 2, both markets sell apples but market 1 sells its apple for $1 and market 2 sells its apple for $2. This is where an Arbitrageur finds the opportunity and leverages it by going to market 1 to buy an apple for $1 and taking it to market 2 to sell it for $2. In this case for each apple he sells, he is making a total of $1 profit each. If he buys 100 apples from market 1 and sells them to market 2, he will be making a total of $100 in a very short period. The normally happens due to imperfect information that leads to the price difference.
In the crypto world, there are over 200 exchanges, with a large price distribution, you can see it in coinmarketcap.com. On this site, you will see different coins and their price differences which occur due to imbalances in supply and demand. Price discovery in the crypto market is usually done separately for each of the coins, due to this, a large exchange with bigger liquidity coins drives the price and the smaller liquidity coins exchange follows them and this does not happen immediately. The time in between the change of the smaller exchange happen is where the Arbitrage occurs. An example is the Kimchi Premium
However, in cryptocurrency there have been many technologies that have helped to check for arbitrary in the market, this is done by the use of trading algorithms and powerful computers, due to this the difference in prices is usually short-lived.
2-Make your research and define the types of Arbitrage (Define at least 3 Arbitrage types)
Arbitrage which is normally known as a trading opportunity in today’s financial markets, today we will be looking at some types of Arbitrage opportunities in the market.
Risk Arbitrage:
Risk Arbitrages are not truly arbitrage because it is not risk-free and speculative. This type of Arbitrage is usually made by predicting mergers and acquisitions. It can also be called merger arbitrage. It can be for you to buy stocks in the process of a merger & acquisition.
This kind of Strategy is used by the hedge funds, which usually purchase the target’s stock and sell immediately the stocks of the acquirer. An example of the risk Arbitrage can be seen below in the illustration, Jerry knew that Firm A may be acquired by Firm B, Jerry thinks that the trading price of firm A will increase after the deal has be done. So due to his speculation, he buys the shares of firm A, with the hope that he can generate profit from the price difference between the current trading price and the trading price of Firm A after the take over the deal. Meanwhile, the strategy is not always risk-free, because the deal might not work as he has predicted.
Simple Arbitrage:
In this type of Arbitrage, You simply buy the coin from one exchange and sell it on a different exchange at the same time. You can earn the difference in price In this case. You can also transfer the coin between exchanges. You can also do this by having fiat and crypto balance on both exchanges, so you effectively buy or sell on one exchange or the other one at the same time. example, if dogecoin is $40 in Coinbase and $50 in Binance. You can buy 100 dogecoins on coinbase and sell it on Binance, thereby making a whooping sum of $1000.
Fiat Triangular arbitrage:
this type of Arbitrage occurs when you have 3 assets, are involved, with one shared asset between the pairs. An example is LTC/USD and LTC/ETH, In this case, Litecoin is the shared asset but we have 3 assets. If I buy 1 LTC for $500 on Binance, send it to Korean exchange and sell it for $900 worth of ETH. Then you can convert the ETH to USD and make of profit of $400. These opportunities usually happen between exchanges serving a local market.
This normally occurs among 3 pairs of coins, and arranging can form a triangle that is why it is called a Triangular Arbitrage Strategy. The Arbitrageur Usually spread his crypto asset between many coins depending on his choice. The type of Arbitrage is usually done by simply converting from one crypto to another until it gets back to the first crypto. It can be done in one exchange platform, you don’t need more than one exchange for this to take place. The triangular arbitrage works by you taking advantage of the mispricing between 3 pairs of coins. For Example, ETH/BTC, ETH/LTC, and LTC/BTC. As I have said before, they form a triangle. If you login to coinmarketcap.com, the ratios are being given in USD prices
Let's do the explanation of the chart above, Mr. A had 500BTC, Mr. A then exchange his Bitcoin with Litecoin at 0.09, which made him have 45LTC. Mr. A went further to exchange his 45LTC with Ethereum at the rate of 5.78, which made him have 7.78ETH. Mr. A still went further to exchange the 7.78ETH back to Bitcoin at the rate of 89, making him have 692.90 BTC. With this Triangular Arbitrage Strategy, he has made 192.9BTC within a very short period. This is how effective this strategy is.
4- Make a real purchase of a coin at a slightly lower price in a verified exchange and sell it in another exchange for a higher price. (Explain how you get your profit after performing Arbitrage Strategy, you should provide screenshots of each transaction showing Bid, Ask prices)
On this exercise, I have made an inter exchange platform arbitrage trade by;
- Buying 15 USDT worth of TRX from my Binance at 0.09554 USDT,
- Sending the bought TRX to Poloneix exchange,
- Selling the TRX at Poloneix exchange back to USDT at 0.095706 USDT,
Now making a profit of (0.095706-0.09554) / (0.09554) = 0.00173 (approximately 0.2% profit)
5- Invest for at least 15$ worth of a coin in a verified exchange, and then demonstrate the Triangular Arbitrage Strategy step by step using any other coins such as BTC and ETH. (Explain how you get your profit after performing Cryptocurrency Triangular Arbitrage Strategy, you should provide screenshots of each transaction)
On this exercise, I made a triangular arbitrage on the TRX coin on the Binance exchange by;
- Buying 15 USDT worth of TRX from my USDT at 0.09506 USDT,
- Selling the TRX to BTC at 0.000001199 BTC (equivalent 0.095343 USDT)
- and then selling the BTC back for USDT at the estimated bought price of 48,112 USDT
Now I can calculate my profit as: (0.095343-0.09506) / (0.09506) = 0.0029 (approximately 0.3%)
Picture from Binance
Picture from Binance
Picture from Binance
Picture from Binance
Picture from photoshop
6- Explain the Advantages and Disadvantages of the Triangular Arbitrage method in your own words.
We have known a lot about triangular, let's now look at the advantages and the disadvantages.
Advantages - Triangular Arbitrage usually increases the liquidity of the market due to the number of times one gets into the market.
- Triangular Arbitragers normally enter the market very fast without wasting much time on technical analysis.
- Using the triangular Arbitrage, the chances of your money being lost is very low.
- You can make a huge profit using the triangular arbitrage
- Your trading speed and ability will increase, because sometimes you use more than one software
- Your knowledge about different coins will increase tremendously because you will constantly check on them for the update.
Disadvantages - Fluctuation in price can make you lose a lot of money
- Some times the trading fee for some coins will be very than the profit that you have made
- Due to the supercomputer and so programs that is been design, it might be very difficult to spot a Triangular Arbitrage
- In a less liquidity market, your trade may hang and this can lead to a very huge loss.
- You still to have a little knowledge of the market to help you obtain the right entry point and exit point of the market
Conclusion
In conclusion, Arbitrage trading is good but the profit depends totally on how many coins you want to buy or sell, that is for you to make it big using the Arbitrage trading strategy, you will have enough money. We also saw some major disadvantages of Arbitrage traders and the fact that supercomputers and some algorithms are working effectively to reduce arbitrage, but there are still opportunities in the market if you are an Arbitrage trader but you have to be consistent and stick to one strategy in the Arbitrage market. This topic was lovely, I want to use this medium to thank the professor that choose the topic.Cc: @reddileep