[Cryptocurrency Triangular Arbitrage]-Steemit Crypto Academy | S4W4 | Homework Post for @reddileep
QUESTION 1
Define arbitrage trading in your own words
Arbitrage trading
Arbitrage trading is a scenario which we see or carryout which involes the buying the buying of an asset as to our case I will be mentioning the cryptocurrencies, from one market which could be an exchange and selling it simultaneously in another exchange.
This is done actually by buying with a cheaper price from the first exchange and selling it at the most available price which is higher in another exchange.
We see that investors can make quick profits from this said arbitrage trading, as we see the profits variety instant.
Let’s take a simple example on the arbitrage trading, we purchase a said cryptocurrency x at a value of $0.94, and we purchase 1000 of it
It means we have;
0.94 * 1000 = $940
We then transfer the x cryptocurrency to another exchange which shows a buying opportunity with a higher price. On checking the rates, the x cryptocurrency cost $0.96,
It means we have;
$0.96 * 1000 = $960
So I have made a profit of $20 after the subtraction of 960 from 940.
The profit was made just from buying from one exchange and selling in another exchange.
QUESTION 2
Make your own research and define the types of arbitrage (define at least 3 arbitrage types)
Types of Arbitrage Trading
We have a good number of arbitrage trading which include cryptocurrency arbitrage, triangular arbitrage, statistical arbitrage, betting arbitrage, cover interest and uncovered interest arbitrage. I will be explaining in details 3 of the listed arbitrage.
Cryptocurrency Arbitrage
Beginning with cryptocurrency arbitrage, the cryptocurrency arbitrage is a scenario is which we see the prices of a particular cryptocurrency with a lower price on a first exchange and with a higher price on the second exchange. This is normally seen as bigger exchanges dominate the market with its current value.
In this regards, we see smaller exchanges trying to adjust its prices in a lag time. It is this time in which we can use to take advantage of in the market.
A simple is example is the one explain above where we purchased a currency at a value of $0.94, where we purchased 1000 units and later sold it a $0.96 on the second exchange making a profit of $20
Covered Interest arbitrage
The cover interest arbitrage takes advantage of interest rate between two countries. In this case we use the forward contract in limiting the exposure of the exchange rate risk.
Explaining in details, the cover interest arbitrage is executed through exchanging domestic as well as foreign currencies at the current rate and the hedging exchange rate risk through selling or buying the forward contract in a foreign currency.
Statistical Arbitrage
The statistical arbitrage with the common name stat arb, is known to be an algorithmic trading strategy.
Explaining how it is carried out, the statistical arbitrage is takes into consideration the mean reversion in exploiting the price movement between different financial instruments. This is done by analyzing the price anomalies across the instruments. This type of arbitrage is mostly carried out by investment banks and hedge funds.
QUESTION 3
Explain the triangular arbitrage strategy in your own words. (you should demonstrate it through your own illustration)
The Triangular Arbitrage
In the triangular arbitrage, it is a strategy in which we use to take advantage of the prices of 3 different cryptocurrencies.
With this we often notice that one market is undervalued while another is overvalued, this is the perfect condition in which the arbitrage trading strategy comes in.
Explaining now its principal process; we are going to exchange the first currency or to say a stable currency such as usdt, bnb, busd to another cryptocurrency, which is the second and then the second to a third cryptocurrency and then finally the third back to the first.
Demonstration
- First Currency: USDT
- Second Currency: Ripple
- Third Currency: Bitcoin
Let us say we buy 100 units of ripple at a price of 0.92/usdt, which is our first crypocurrency; that means we have 92ripples; I then buy the third cryptocurrency which is bitcoin using the ripple, at the rate of 0.0000294/ripple, so I will have 0.0000294*92 = 0.0027btc. I then finalize by converting the 0.0027btc back to usdt I will have 41,300 * 0.0027 = 111.5usdt I have made a profit of 111.5 – 100 = $11.5
This can be seen in the image below.
design with photoshop
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. Explain how you get your profit after performing arbitrage strategy, you should provide screenshots of each transaction showing bid, ask price
Real transaction illustrating cryptocurrency arbitrage
Step 1: Purchasing xrp in Binance
I will be using two exchanges to carry out this transaction which are the Binance Exchange and the Poloniex Exchange. I begin by logging into my binance account and clicking on the market tab, where I search the ripple(xrp) cryptocurrency. I will be purchasing 110 Ripple at a rate of 0.9158 which cost 100.738usdt.
Step 2: Transferring Ripple to Poloniex Exchange
After my purchase I now need to transfer the ripple very quickly to the poloniex exchange since I can sell at a slightly higher price which I will be showing soon. I proceed by logging into poloniex and copied the deposit address and sending from binance as shown on the screenshots below.
Step 3: Selling the Ripple
Now I have the deposit arrival, I proceed by selling the ripple at the available price. I will be selling the 110 ripple for a price of 100.877usdt at a rate of 0.917
Therefore I have made a profit of 100.877 – 100.73 = $0.147
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 coin such as btc and eth. Explain how you get your profit after performing cryptocurrency triangular arbitrage strategy, you should provide screenshots of each transaction)
Demonstrating Triangular Arbitrage
I will be using the following cryptocurrencies as my first, second and third for the transaction.
- First cryptocurrency = usdt
- Second cryptocurrency = ripple
- Third cryptocurrency = bitcoin
Step 1: Purchasing Ripple using usdt
I begin by login into my binance exchange as I will be using it. And clicking on markets I search the xrp/usdt, and take a buy order. This is shown in the screenshots below. I will bw purchasing 55 xrp with 50usdt at a price of 0.9055.
Step 2: Purchasing btc with xrp
I then search the xrp/btc pair and click on sell, as I will be selling the xrp to get btc.
I will be selling for a price of 0.00002189 as shown on the screenshots below.
Step 3: Selling the btc for usdt
I now need to sell back the btc in exchange for usdt since it was the first currency. I can achieve this by searching for the btc/usdt on the market section and taking the sell option as shown on the screenshots below. I sell the 0.0011839, for 50.27usdt at a rate of 42600.
Profit declaration
Start: 50usdt
End: 50.27usdt
Profit = 50.27 – 50 = $0.27
design with photoshop
QUESTION 6
Explain the advantages and disadvantages of the triangular arbitrage method in your own words.
Advantages of the Triangular arbitrary strategy
The first advantage I will be talking of is on time. The triangular arbitrary trading strategy is really time efficient, you can carry out the complete strategy in less than 2 minutes in with a good capital for it in the right trade you can make a really good amount of profits in no time rather than analyzing charts over charts the whole day.
Using this strategy we can increase the liquidity of the market. We know liquidity is mostly increased through the injection of high volume in the market, and with arbitrary strategy it has been notice that those who carry out this trading type usually involve high capital which actually adds the liquidity in the market.
We can trade in lower risk using the triangular arbitrary trading strategy. This is because of the timing involved in executing and closing trades. Which means we actually have lower risk using this strategy which is what every trader hopes for.
Disadvantages of the Triangular arbitrary strategy.
The first disadvantage I will be explaining is the trading fee. I for one have witness this. We might purchase some cryptocurrencies with high fees that at the end we turn up with a loss, which is the reason why the strategy needs a huge capital to cover up that.
With the triangular trading strategy. We see that in events where we make mistakes in the entry points, we may make losses in which we did not prepare for. This is the reason why we need to be fast once we begin the strategy.
In scenarios of fluctuations, we see the final cryptocurrency which was to be received might turn to be lower. This is due to high volatile markets.
Conclusion
So far, we have seen the arbitrage trading style and the various types which include the triangular arbitrage involving buying 3 different cryptocurrencies from the first to the third, currency arbitrage involving buying one cryptocurrency from an exchange and selling in another. We also have so many others as listed above.
All screenshots are taken from Binance and Poloniex, unless otherwise stated
CC: @reddileep