Steemit Crypto Academy Contest / S13W2 - Triangular arbitrage.
Triangular arbitrage is a kind of trading strategy that is most commonly used in financial markets as well as it also has use in cryptocurrency market and basically there is a involvement of taking benefit of price discrepancies between three different cryptocurrencies for the purpose of making profit from them.
If you imagine that you have three different cryptocurrencies and the script currencies are A,B,C let's suppose. So when we apply triangular arbitrage strategy on them then exchange rates between A,B and C cryptocurrency would not match correctly so this kind of discrepancy between all these cryptocurrencies permit you to execute are trading series so that you may make benefit and profit of them. By this imaginary cryptocurrencies I can give you an example of it related to its working but we will discuss its working later.
There is a requirement of monitoring different currency pairs and acting in a speedy way for increasing the opportunities to take advantage during triangular arbitrage. This is I am saying because triangular arbitrage opportunities are mostly for a short period of time and there is a requirement of significant trading volume for gaining maximum profits. Most accurate calculations and executions are required for prevention of transaction slippage and costs by strategy which is triangular arbitrage.
Triangular arbitrage is most popular because of presence of multiple exchanges and nature of high volatility. Price discrepancies are scanned by different traders when they use different algorithms or automated bots across different exchanges and in this way they execute different trades in automatic way.
It is true that triangular arbitrage strategy is very worthy as well as it is also complex but there are also risk involvement in this strategy just like other strategies. When market conditions change in a rapid way then execution of trades with precision could be a very challenging and risky thing. There are some exchanges that also have restrictions which can effect gaining of profit in strategy.
Triangular arbitrage is a complex strategy as I have already talked in some of my works in above question but I would like to explain its working in some of my simple words that how to do triangular arbitrage trading so if you understand the answer of first question in a proper way then surely this example would be very easy to understand for all of you.
There is a need of multiple cryptocurrency exchange if we want to applied triangular arbitrage trading and we need multiple cryptocurrency exchange that also offers trading pairs. First of all I want to explain now some of the important steps behind working of triangular arbitrage trading.
1. Choose your currencies:
First of all you should choose three cryptocurrencies that should be different and these should be the cryptocurrencies that you want to trade so suppose that I am choosing Bitcoin,Ethereum and Litecoin.
2. Identify the trading pairs:
Look for trading pairs that involve all three currencies. In this case, you'll need to find BTC/ETH, ETH/LTC, and LTC/BTC pairs on different exchanges.
3. Monitor exchange rates:
Monitoring of exchange rate is very important step so it is always important to consider exchange rates of these tracking pairs across different exchanges so that you may understand about price discrepancies that could be responsible for creation of having an arbitrage opportunity.
4. Calculate potential profits:
After that you should be compare the exchange rates so that you make calculate the potential profits. For this you should suppose that if BTC/ETH rate at one exchange is greater than the ETH/LTC rate at another exchange and on the other hand if LTC/BTC rate is greater on 3rd exchange than the BTC/ETH rate then there are many brighter chances for you to having an opportunity for triangular arbitrage.
5. Execute the trades:
If there is a confirmation of triangular arbitrage opportunity you have which is also very profitable then you should act about it in a quick way so after that here I am explaining a step by step breakdown of trades that how they work in a proper way.
| 1 | a. Trade 1: |
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First of all there is a need to recognize that what is your initial cryptocurrency and after that there is a need to convert your initial cryptocurrency into second cryptocurrency so suppose that BTC is your initial cryptocurrency so now you should convert it into ETH at favourable exchange rate.
| 2 | b. Trade 2: |
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Now you have to convert second cryptocurrency into third cryptocurrency so from the above step you understand that second cryptocurrency is ETH we suppose so now we would convert ETH into LTC at favourable exchange rates again.
| 3 | c. Trade 3: |
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Third Cryptocurrency is LTC we suppose above sunao we would convert third cryptocurrency into initial cryptocurrency which was BTC at favourable exchange rates.
6. Calculate profits and fees:
After the completion of these three trades that I have explained above there would be a time for you to calculate profits and fees and for this you would compare amount of initial cryptocurrency before and after trades. After that I want to add one thing more that overall profitability can be affected by fees charged by exchanges for any transaction and you would need to be accountable for this.
7. Repeat the process:
I have already discussed that triangular arbitrage strategy is an opportunity that could be for short period of time so constant monitoring of market for getting new and new opportunities is very important so that you may prepare yourself to act in a quick way and to execute trade in a precise way.
Arbitrage and triangular arbitrage are two trading strategies but they are not similar all to all and there are many clear differences between both of them so let's have a look at some of the differences that they have.
Arbitrage:
| 1 | Definition |
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Arbitrage is defined as a trading strategy in which there is a practice of buying an aasset at low price in one market and then selling it at higher price in another market in a simultaneous way for the purpose of gaining profit from price differences of two markets.
| 2 | Exchange involvement |
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There is an involvement of two markets or exchanges in arbitrage strategy.
| 3 | Focus |
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Arbitrage strategy focus on the exploitation of price differences between two assets or trading pairs.
| 4 | Process |
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Arbitrage strategy process is unique and it involves buying low in one market and selling these assets high into another market.
| 5 | Example |
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Example of arbitrage involves that for example if you are buying Bitcoin on an exchange for $10000 and you are selling it on another exchange for $10,500 making a profit of 500$.
Triangular Arbitrage:
| 1 | Definition |
|---|
Triangular arbitrage is a strategy in which there is involvement of exploitation of price differences between any three cryptocurrencies for the purpose of making profit from them.
| 2 | Exchange involvement |
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In triangular arbitrage as the name is indicating that there is an involvement of 3 exchanges.
| 3 | Focus |
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Triangular arbitrage is are trading process or strategy which focuses on exploitation of price discrepancies between trading pairs or 3 different cryptocurrencies.
| 4 | Process |
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Process of triangular arbitrage is complex to some extent because it involves the execution of series of trades between 3 different cryptocurrencies for purpose of gaining profit.
| 5 | Example |
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Suppose you have BTC,ETH and LTC as three cryptocurrencies.If BTC/ETH rate at one exchange is greater than the ETH/LTC rate at another exchange and on the other hand if LTC/BTC rate is greater on 3rd exchange than the BTC/ETH rate then there are many brighter chances for you to having an opportunity for triangular arbitrage.
Now let's discuss some of the key differences between both of trading strategies.
| Number of Markets/Exchanges | Number of markets and exchanges that are involved in arbitrage are lower than number of markets and exchanges that are involved in triangular arbitrage as I have already discussed that arbitrage involve two exchanges and triangular arbitrage involve three exchanges. |
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| Focus | Arbitrage really have a focus on exploitation of differences in prices between two assets and triangle arbitrage have a focus on exploitation of discrepancies in prices between 3 cryptocurrencies. |
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| Process | Arbitrage involves a process of buying an asset in low price in one market and then selling it into another market at high price and gaining profit in this way while triangular arbitrage execute series of trades in between three cryptocurrencies and then take advantage of the price discrepancies |
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| Complexity | If I talk about complexity difference between both of these processes and strategies then according to me arbitrage is less complex then triangular arbitrage as I have discussed that there is involvement of two assets in arbitrage and there is involvement of three cryptocurrencies in triangular arbitrage. |
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So above was the overall differences and summary of differences between arbitrage and triangular arbitrage.
If we use 10,000 steem as first or initial cryptocurrency and we apply triangular arbitrage process upon it and we suppose that remaining to cryptocurrency that we are choosing are Bitcoin and Ethereum so let's apply the process on it.
Conversion of Steem (STEEM) to Bitcoin (BTC)
Suppose that current exchange rate is;
1 steem = 0.0025 BTC
By involving my10,000 STEEM, I can make conversion of it to 25 BTC (10,000 STEEM * 0.0025 BTC/STEEM).
Conversion of Bitcoin (BTC) to Ethereum (ETH)
Now again we have to suppose that exchange rate for BTC to ETH is;
1 BTC = 10 ETH
So now when I would use my 25 Bitcoin I would be able to convert it into 250 ETH(25 BTC * 10 ETH/BTC)
Conversion of Ethereum (ETH) back to Steem (STEEM)
As in above steps I have told that during third step we have to convert third currency into initial currency again so initial currency was steem so now;
We have to suppose that exchange rate for ETH to steem is;
1 ETH = 0.01 STEEM
By the use of my 250 ETH I can convert it back into 2500 steems (250 ETH * 0.01 STEEM/ETH).
Till now I have completed my triangular arbitrage loop but now we have to calculate profit because still we don't calculate our profit so first of all I would like to you know that what is the requirement of data for the calculation of profit.
We all know that initial investment of initial cryptocurrency was 10,000 steems and final amount after that triangular arbitrage that we get was 2500 steems so whenever we have to calculate profit then we always need subtraction procedure and in this procedure we subtract initial investment from the final amount that we get so let's subtract both of them as I am subtracting below;
Profit = Final amount - Initial investment
Profit = 2,500 steem - 10,000 steem
Profit = -7,500 steems
We can see that this is a triangular arbitrage that was in loss of 7500 steems so now one thing is also cleared to all of you that it is not necessary every time that triangular arbitrage could only result in profit it's an also result in loss and there are many risks involved with triangular arbitrage also.
This was not an actual example it was just an imaginary example so before you are doing any attempt or you are participating in any trading strategy either it is arbitrage or triangular arbitrage it is important for you to have a thorough research and monitor exchange rates so that you may get aware on your own before doing any activity like this.
hello, dear @khursheedanwar You have provided a comprehensive and detailed explanation of triangular arbitrage, including its definition, execution steps, and differences from regular arbitrage. Your example of triangular arbitrage involving Steem, Bitcoin, and Ethereum helps to illustrate the concept effectively. Well done!
I am happy to see your comment at my post as well as I want to say one thing to you that I am happy that you consider my explanation are very extensive overview of this topic as well as you understand each and everything in a good way and by my examples you perceive the concept very effectively I wish you good luck also and I would like to visit your entry too very soon
Great job , @khursheedanwar! Your explanation of Triangular arbitrage is really helpful and easy to follow. The examples you've provided make it even clearer.
Thank you so much friend for stopping by my post I am happy to see your comment here as well as I am happy that my examples make each and everything clear for you to understand I wish you good luck and I would also like to visit your entry very soon
Thanks @chant
Hello brother.
You have explained about Triangular Arbitrage in your simple words and Anyone can understand about this topic through your post. You have really discussed well about how to do triangular arbitrage.
Good Luck for the contest.
I am happy to see your comment at my post and yes my brother I extremely agree with you that triangular arbitrage I have explained in simple words but it was a very simple topic in real and according to me it was not a complex topic but it was logical so I tried my best to give practical examples so that all of you may understand my concepts what I tried to deliver to all of you
I wish good luck and success to you in your entry and I am hopefull that when I would visit your entry then it would also add in my knowledge
Hola Khar 😊
Se nota que estas involucrado con la tarea y que le dedicaste bastante tiempo para desarrollar cada pregunta. Es un tema muy interesante sin duda alguna pero un concepto un poco desconocido para mi hasta el momento.
Gracias por compartir esta valiosa informacion
Hello dear
I totally agree with you that I take a lot of time to write each and every question and I was very dedicated I created this post with full of my interest and I am happy that if you understand my concepts a little bit then it is very appreciating for me
I wish that I may visit your entry too thanks for your wishes and good comment