Cryptocurrency Triangular Arbitrage - Steemit Crypto Academy | S4W4 | Homework Post for @reddileep

in hive-108451 •  4 months ago 

steemit crypto academy - arbitrage trading.jpg

Question 1 - Define Arbitrage Trading in your own words

When it comes to cryptocurrency, arbitrage trading is very popular and traders make use of it to make quick profit with less risk. Arbitrage Trading is basically trading opportunity that involves a trader capitalizing on price differences between multiple crypto exchanges or multiple cryptocurrency pairs to make quick profit while taking less risk. Arbitrage Trading, a trader can capitalize on price differences between 2 crypto exchanges to make profit. For instance the price of MATIC on Okex and Huobi is different. The price of MATIC is higher on Okex, the trader will quickly buy MATIC tokens on Huobi at a cheaper price, send it to Okex exchange and sell it at a higher price.

Also, a trader can capitalize on price differences between 3 cryptocurrency pairs to make profit. For instance there is a cross rate difference between MATIC/ETH, BNB/ETH and MATIC/BNB. MATIC/ETH and MATIC/BNB are valued against BNB/ETH. The trader can capitalize on this price difference to make quick profit with very minimal risk involved. Let’s say the value of BNB/ETH is lower compared to both MATIC/ETH and MATIC/BNB, the trader can quickly sell MATIC to acquire ETH, sell that ETH to acquire BNB and sell the BNB to acquire back MATIC. If done right, the trader would have more MATIC coins which can be sold for quick profit. Depending on the arbitrage type, the trader makes profit while taking very minimal risk.

Question 2 - Make your own research and define the types of Arbitrage

When it comes to arbitrage trading, there are different types that is common in the crypto space. 3 main arbitrage types are; exchange arbitrage, triangle arbitrage and merger arbitrage.

Exchange arbitrage

Exchange arbitrage is one of the common arbitrage types in the crypto space. Exchange arbitrage is basically trading opportunity that involves a trader capitalizing on price differences between 2 crypto exchanges to make quick profit while taking very minimal risk. In exchange arbitrage, a smart crypto trader can spot that the price of a particular cryptocurrency is different between two crypto exchanges and capitalize on price differences to make profit.

For instance the price of ATOM/USDT is a little bit higher on Okex exchange with a price of $41.56 than ATOM/USDT on Huobi exchange with a price of $41.47. A smart trader who is quick enough to who spot the difference in price of ATOM/USDT on Okex and Huobi can quickly buy ATOM on Huobi at a cheaper price, send it to Okex exchange and sell it at a higher price to make quick profit. To demonstrate this, a trader pays $809.4 to buy 20 ATOM on Huobi at a price of $40.47. The trader sends all the ATOM to Okex exchange and sell it at a price of $41.56, the trader will get $831.2. If we subtract $809.4 from $831.2, the trader will have a profit of $21.8.

Triangular arbitrage trading

This is another very popular type of arbitrage in the crypto space. Triangular arbitrage is basically a trading opportunity that involves a triangle of 3 cryptocurrency pairs. Triangular arbitrage involves a trader capitalizing on price differences between 3 cryptocurrency pairs to make quick profit while taking very minimal risk. If a crypto trader notices that there is a cross rate difference between MATIC/ETH, BNB/ETH and MATIC/BNB and MATIC/ETH and MATIC/BNB pairs are valued against BNB/ETH. The trader can capitalize on this price difference to make quick profit while taking very minimal risk.

Merger arbitrage

This type of arbitrage trading involves two merging companies. Merger arbitrage is basically a trading opportunity that involves a trader capitalizing on price differences between stocks of two merging companies. When 2 different companies want to merge and the news is made public, the value of the stock of both companies might decrease due to sentiments in the market. A trader can capitalize on this by buying the stocks at a cheaper price and sell it at a higher price when both companies merge and their stock becomes more valuable.

To demonstrate this, a trader finds out from a news that two companies will be merging. The trader becomes alert and buys the stock if the prices drops in value due to different sentiments in the market. Once the merging is complete, there is a high chance that the value of the new stock will increase in value which give would put the trader in profit.

Question 3 - Explain the Triangular Arbitrage Strategy in your own words.

Triangular arbitrage is basically a trading opportunity that involves a triangle of 3 cryptocurrency pairs. Triangular arbitrage involves a trader capitalizing on price differences between 3 cryptocurrency pairs to make quick profit while taking very minimal risk. For instance, a trader can capitalize on price differences between 3 cryptocurrency pairs such as MATIC/ETH, BNB/ETH and MATIC/BNB to make profit.

To demonstrate this, a crypto trader notices that there is a cross rate difference between MATIC/ETH, BNB/ETH and MATIC/BNB and MATIC/ETH and MATIC/BNB pairs are valued against BNB/ETH. The trader can capitalize on this price difference to make quick profit while taking very minimal risk. Let’s say the value of BNB/ETH is lower compared to both MATIC/ETH and MATIC/BNB, the trader can quickly sell MATIC to acquire ETH, sell that ETH to acquire BNB and sell the BNB to acquire back MATIC. The trader will now have more MATIC. This means that the trader has made profit.

Triangular Arbitrage.jpg
[Design created by me]

From the illustration, we can see the triangular arbitrage clearly represented. A trader already has 5000 MATIC coins in his wallet. The trader discovers that there is a cross rate difference between MATIC/ETH, BNB/ETH and MATIC/BNB. MATIC/ETH and MATIC/BNB are valued against BNB/ETH. Meaning that the value of BNB/ETH is lower compared to MATIC/ETH and MATIC/BNB. The trader capitalizes on the opportunity to make a quick profit.

Price of MATIC/ETH - 0.00037425 ETH
Price of BNB/ETH - 0.1242 ETH
Price of MATIC/BNB - 0.002917 BNB

The trader quickly sends his 5000 MATIC to the exchange for the trading.

Sells 5000 MATIC for ETH** at 0.00037425 ETH
The trader gets 1.871250 ETH

Sells 1.871250 ETH for BNB at 0.1242 ETH.
The trader gets 15.0664 BNB

Sells 15.0664 BNB for MATIC at 0.002917 BNB.
**The trader gets 5,165.03 MATIC

Profit = 5,165.03 MATIC – 5000 MATIC
Profit = 165.03 MATIC

The profit made by the trader is 165.03 MATIC


Question 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

Exchange Arbitrage only occurs when there is an opportunity to have two different prices on two exchanges. This can be very difficult in a highly volatile market and can be difficult to execute due to various factors such as withdrawal transaction times and volatility. For this demonstration, I will be making use of The Okex exchange and Huobi exchange.

The price of TRX/USDT on Huobi exchange is 0.096461 and will be selling the TRX on Okex at the price of 0.10100

To illustrate this;

Buy price of TRX on Huobi Exchange - 0.096461
Sell price of TRX on Okex Exchange – 0.10100

Bought 220.02 TRX on Huobi at an avg price of 0.095443
The cost of purchasing the TRX = 220.02 x 0.095443 = 21 USDT
After the trading fee of 0.44 TRX was charged, 219.58 TRX was left.

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After that, the next was to withdraw the TRX directly to Okex exchange. Withdrawal fee of 1TRX was charged and 218.58 TRX was sent to Okex exchange.

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I received the TRX on Okex exchange

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I placed a Sell trade 218.58 TRX of at price 0.10100

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218.58 x 0.10100 = 22.07658
Approx 22.077 USDT

The profit is 22.077 USDT – 21 USDT = 1.077
The profit value is 1.077 USDT


Question 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.

Triangular Arbitrage only occurs when there is a cross rate opportunity between 3 cryptocurrency pairs. This is not easy to find due to the highly volatile cryptocurrency market which can make it very difficult to execute. For this demonstration, I will be making use of DOT, ETH and BTC

Sold 1.0092 DOT on the DOT/ETH pair at 0.009531 ETH
Receives 0.009612 ETH

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Sold 0.009612 ETH on the ETH/BTC pair at 0.07152 BTC
Receives 0.0006863 BTC

Screenshot (4201).png

After that, it was time to Buy back the DOT on the DOT/BTC
Buy 1.0523 DOT on the DOT/BTC pair at 0.0006522 BTC
Receive 1.0523 DOT

Screenshot (4203).png

Profit: 1.0523 – 1.0092 = 0.0431 DOT
Profit of 0.0431 DOT


Question 6 - Explain the Advantages and Disadvantages of the Triangular Arbitrage method in your own words.

Advantages of Triangular Arbitrage Trading

Low-Risk

This is one of the main advantages of Triangular Arbitrage because there is less risky since the trader is executing the trades between the different cryptocurrencies simultaneously on the same exchange. However, the trader needs to be quick to capitalize on the price difference because arbitrage opportunities doesn’t last long.

Quick profit

This is the obvious advantage of Triangular Arbitrage because it is a fast way for smart traders to make quick profit without doing much work. All the trader needs is to be fast in executing the trades to capitalize on the cross rate between the 3 cryptocurrencies.

Faster to execute

Triangular Arbitrage is much faster to execute compared to a lot of other Arbitrage types because the trades are happening on the same exchange and traders can make use of bot to automate the execution process. Bots can play a very important role when it comes to trading and Arbitrage traders can make use of specialized bots to spot and execute the trades.

Disadvantages of Triangular Arbitrage Trading

Sudden price Increase on the second crypto pair

As far as crypto is concerned, the market is always volatile which means that the market can move at any direction based on different factors. Because there are 3 cryptocurrency pairs involved in triangular arbitrage, there is a possibility that the price of the middle crypto pair increased against the first which will result to less quantity of the first cryptocurrency.

Price slippage

This is another risk that is involved when it comes to triangular arbitrage. The volatility of the market can lead to price slippage which is basically a quick change in price between what is expected and the market price when using the market order type. Because arbitrage trading uses the market order type to execute the trades, there is a possibility that the market price changes before the trade is executed. This will result will be unfavourable.

Conclusion

The whole idea of trading is to make profit and traders will always be on the lookout for trading opportunities to make profits. When it comes to cryptocurrency, arbitrage trading is very popular and traders make use of it to make quick profit with less risk. Arbitrage Trading is basically trading opportunity that involves a trader capitalizing on price differences between multiple crypto exchanges or multiple cryptocurrency pairs to make quick profit while taking less risk. However, eventhough there is less risk in arbitrage trading, it is also important to have in mind that there are also risk involves which can be a big disadvantage when doing arbitrage trading. With that in mind, arbitrage trading have proven to be a quick and less risky way for traders to make profit in the cryptocurrency market.

@reddileep

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