💰 Triangular Cryptocurrency Arbitrage Insights 💰 - Part 2 - Choosing country / currency / exchange

in arbitrage •  3 months ago

This is part 2 of a multi-part series of my experience with triangular cryptocurrency arbitrage. Personalized advice and consulting is available on request (mention on Twitter @victorfigol.

As mentioned in Part 1 triangular cryptocurrency arbitrage requires two currencies.

Choosing currency A

That would the base currency and your capital for arbitrage purposes. For most users reading this that will probably be USD or EUR. Your goal is to increase that capital with minimal risk through arbitrage.
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Choosing currency B

That would be a currency in a country like South Korea, Thailand, South Africa, Indonesia etc where capital controls and regulations are stricter making cryptocurrency more expensive. Let's call this the exotic currency.
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Standard triangular arbitrage sequence

Below is the standard sequence. Home bank and home exchange is where your base currency is deposited.

  1. Buy crypto, spending base currency | Home exchange
  2. Transfer crypto | Home exchange ➡️ Foreign exchange
  3. Sell crypto, making exotic currency | Foreign exchange
  4. Withdraw exotic currency | Foreign exchange ➡️ Foreign bank
  5. Convert exotic currency back to base currency | Foreign bank
  6. Wire transfer base currency | Foreign bank ➡️ Home bank
  7. Deposit base currency to exchange | Home bank ➡️ Home exchange
  8. Repeat

Things you should know about the base currency

Normally you can move a large volume of this currency since you will be a citizen/resident of that country. However banks have a profile on your activity, so if you usually did small transactions and suddenly you move 5-6 figures daily, the bank will ask you to provide new information regarding your average monthly and annual transaction volume. You can also be proactive and update your profile yourself, online or physically at a branch depending on the bank.

The cryptocurrency exchange will do due diligence and ask for additional documentation to prove the source of your money when your volume increases significantly. People are surprised when they open a new account easily but then they are asked for various documents. It is normal and required by any respected and trusted exchange. Some exchanges also offer different tiers with higher withdrawal and trading limits. To be upgraded to a higher tier extra documents are required (e.g. proof of residence). Things are changing fast when it comes to regulating cryptocurrencies so it won't be long before crypto exchanges behave like banks.
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You want to convert the exotic currency you make (through the sale of crypto in the foreign country) into your base currency as fast as possible. If you wait the foreign exchange rate will change with unpredictable results (extra profit or loss).

Things you should know about the exotic currency

You will have to be physically in a foreign country to set things up, or have someone on site. If you opt for the second option make sure they are participating in the arbitrage and you are not just using their personal accounts. It won't be nice if something goes wrong and they become liable for your arbitrage operation. Physical presence is required for banking, for getting a local phone number (required by many crypto exchanges) and you might have to visit an office of the cryptocurrency exchange for solving other issues (because nothing goes according to plan).
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You will need to open a foreign bank account. There are some odd exceptions in which a crypto exchange will allow for cash deposits and withdrawals at a crypto branch 😲, but that is not practical for arbitraging and you will be walking around with big bags of paper money 💰. Some banks will not open an account for you if you are a tourist, try different branches of the same bank and different banks. You might still make it, but it gets harder and harder every day.

If you can not open a bank account, you will need to establish residence in that country, which could also make you liable for filing taxes. But there is always some professional to handle all the paperwork for you, so do not let that deter you if the arbitrage profit margins are high. When it comes to arbitrage the harder it is the better the profit will be. It makes the barrier to enter higher, which is a good thing since it reduces the competition. You can also consider doing things by establishing companies, instead of using your personal accounts. Highly recommended if your capitalization is 1mil USD and higher. However expect a lot of scrutiny if that is the sole activity of your company. Big money attracts lots of attention and suspicion so it is easier said than done.

When choosing an exchange opt for the most popular one in the country since it will have the largest trading volume, you want the trades to go through quickly. If you want to increase your risk you can go for the smaller exchanges, the profit margin will be much higher, but trades might stay on the order books for hours and your capital will be at risk. Losses are common with those exchanges. Also the most popular exchanges will have a more robust API, last thing you want is a sell order to get stuck due to non responsive API. Finally you want an exchange that supports many currency/cryptocurrency pairs. In 2017 you would have made more profit arbitraging Ripple instead of Ethereum through the USD/XRP and THB/XRP pairs in Thailand.

Which countries / currencies / exchanges are you going to choose? Let me know in the comments below and feel free to ask anything.
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Part 3 post, mailing list and dedicated arbitrage website are coming next. Stay tuned!

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