When we talk about arbitrage in trading we are specifying a trading strategy where we practice transactions of purchase-sale of an asset in the market at an almost simultaneous moment, so that a profit is obtained by having a difference in the price.

Similarly, this market arbitrage style can be executed in a relatively simple manner since the asset chosen can generally be sold in different exchanges, either in particular ways or through a different financial instrument, so that it provides a discrepancy in price and so, it represents the gain that the trader makes in his trades by making such an exchange, for example, for the same cryptocurrency.

Similarly, such a strategy is known to be relatively low risk, as it is considered an effective technique to eliminate market inefficiencies in a way that ensures that all equivalent assets converge at the same price. However, it should be borne in mind that the guaranteed profit does not exist because the challenge faced by arbitration traders is based on being able to trade quickly because it is not enough just to find those price differences. Thus, with the right amount of capital and speed to participate in this style of strategy, profitable and low-risk operations can be achieved in a short time.

In this way, arbitration is a process that offers good profits if you know how to perform. For this, it is necessary to know the different factors that make it possible for the arbitration to take place, in particular, in the world of cryptocurrencies, of which the following can be listed:

• The volatility, because it is the main risk of the arbitration of cryptocurrencies since when buying and selling in a lasting time, there is the possibility that the arbitrated cryptocurrency changes in price in seconds.

• Transaction costs as possible fees have to be taken into account. Usually the crypto arbitration will give a very small profit percentage so you should try not to go into transfer expenses or result in losses.

• The self-regulated market of cryptocurrencies because being decentralized, the value of the different cryptos will be determined by the supply and demand on the price, so that in countries with greater demand for a specific cryptocurrency, will have an upward trend in its price, while in countries with low demand, the asset price will have a downward trend.

• The price difference between various exchanges as well as the current liquidity, since it foresees that the price of cryptocurrencies will have a high margin, thanks to the demand-supply and the flow of the asset in different ways

• Events in countries where exchanges are established, as they also affect the price of cryptocurrencies and increase the price differential.

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Thus, thanks to the fast and increased volumes of transactions in the cryptocurrency market, unique opportunities can arise to carry out these operations by maximizing profits by buying in low-priced exchanges and then selling them immediately in markets or intermediaries with higher prices.

However, it should be taken into account when starting this activity that it is not an easy strategy to carry out so it takes time for practice and study.

Make your own research and define the types of Arbitrage (Define at least 3 Arbitrage types)

When referring to the arbitrage strategy in trading we must take into account the different techniques to use that strategy that can be carried out in order to obtain benefits, of which we can mention the following:

Simple

It involves buying and selling the same cryptocurrency instantly on different exchanges, being the simplest is one of the most used among traders.

Now, to visualize it more graphically let’s explain it with a simple example: let’s imagine that as a trader, you buy 0.1 ETH on the exchange Y, at a price of $5000 per ETH. Therefore, the investment is $500, however, by having these 0.1 ETH, you offer them for sale in a Z exchange.

The difference is that in this case, the Z exchange is priced at $5500 per ETH. This implies that the 0.1 ETH will have a value of $550, and by selling them, you will earn approximately $50, which would be a gain of more than 5% on an operation of possibly 30 minutes maximum.

Statistical

It consists of a more sophisticated type since it uses programmed algorithms and computer and mathematical trading platforms to identify the exact moment of arbitrage between financial instruments in volatile markets. However, to do so requires risk control and an understanding of spreads, so its main theme is the use of short-term funding with temporary entry and exit in operations for a few seconds or up to a few days.

This type of arbitration is therefore a neutral market strategy, as it consists of opening a long and a short position at the same time to benefit from price irregularities.

Convergence

It aims to buy a cryptocurrency in an exchange where it is undervalued and in turn sell short instantly in another exchange where it is overvalued. Thus, when the two separate prices are at a mid-point, you can benefit from the convergence amount.

Also, it is important to know that it is largely based on statistics and what is known as reversion to the mean, so we seek to find two pairs of assets correlated with the help of correlations calculations. Therefore, once this correlation diverges beyond a certain value, you must buy the weak pair and sell the stronger one. Thus, such a strategy makes it possible to take advantage of price failures in the market and thus benefit from them without taking so many risks.

Triangular

Seeks to take advantage of price differences between three different crypto assets, for example, buy BTC with USDT, sell BTC for LTC and then change LTC for USDT, this type will be further explained below.

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Explain the Triangular Arbitrage Strategy

However, triangular arbitrage, also known as three-point arbitration, is clearly explained by having the word triangular in its name because when visualizing the steps to be performed, it is better to divide it into three simple steps. Thus, to initiate and implement a triangular arbitration differential, the trader must place three operations simultaneously so that profits are made at a very low risk rate by taking advantage of exchange rate differences between three different assets in the chosen market.

Therefore, when buying one currency and selling another, a third currency is used as a basis when such a discrepancy arises between the quoted changes, either because one currency is overvalued with respect to one currency and in turn, it is undervalued with respect to another, in this way, each point in the triangle represents an asset.

The process of such a strategy involves roughly the three essential operations: Changing a cryptocurrency for a second cryptocurrency, the second for a third and finally the third again for the first crypto. However, if we want to be more specific when explaining the steps to be taken to carry out this technique, we can mention the following

• Identify the exact opportunity for triangular arbitrage at the time when the traded exchange does not match the exchange of crossed currencies.

• Calculate the difference between these two rates.

• If there is a difference in the above calculation, the base cryptocurrency is exchanged for the second crypto.

• The exchange operation between the second currency and the third currency is performed.

• Finally the trader again converts the third asset into the first currency. So you get the net benefit by covering transaction costs.

Thus, in carrying out the second operation, one has the security of profit with a risk close to zero since the operation was executed with an exchange at different costs. Having said that, I think it can be better explained with an example:

Suppose that, for the present day, the BTC / USDT is quoted at a rate of 41,693.72, while the exchange rate of ETH / USDT is 2,963.96 and ETH / BTC is 2,884.48. It creates an opportunity for the arbitrator where the trader must perform the following operations: Sell Tether by Bitcoin, and at the same time sell Bitcoin by Ethereum, so that the last operation that is performed is the sale of Ethereum by Tether.

That said, it should be noted that opportunities for triangular arbitrage are scarce, and traders who know how to handle it very well often automate the process with computer hardwares.

On the other hand, it should not be forgotten that most of this type of strategy works when transaction fees are very low, otherwise much of the profit would be spent immediately, unless capital-intensive operations are carried out.

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

The first step you need to take is to choose the crypto with which you will handle the price differential between both platforms, and of course, choose the exchanges to use in the arbitrage operation.

That said, the asset in question is the cryptocurrency Tron of acronyms: TRX. While the exchanges chosen are Binance and Poloniex. So you look for a price difference to buy the cryptocurrency at a lower price and then sell it to a higher one.

Thus, a mistake you might have would be to buy a crypto in one exchange, transfer it to another and sell it, but it could end in loss by not doing the transaction quickly while price differentials will only exist in a few seconds. Therefore it is recommended to eliminate the cryptography transfer step between exchanges and thus act immediately and in that way to obtain profits.

Therefore, by having the necessary funds in both platforms, we take advantage of the difference in the TRX / USDT market, so that it benefits to buy in Poloniex and sell in Binance. Therefore, the following screenshot shows the purchase made at the market Ask price at the time, so that Tron is purchased at USDT 11.97724.

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While the price found in Binance has a higher percentage, so TRX is sold at the latest bid price on that exchange as seen in the picture below.

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So, in an instant, I bought 127 TRX and sold 127 TRX, without losing or winning TRX. But $11.97724 was spent to buy it and it sold for $11.97864, generating a profit of $0.0014.

Having been for $10, you can make the comparison with an investment of $1000, because the profit would be $1.4 because it is such a small price difference.

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

In order to carry out step by step the exchange of cryptocurrencies through the arbitration strategy with a triangular approach, first the appropriate pairs are chosen to identify the suitable entry, for which they are used: SLP / USDT; SLP / ETH; ETH / USDT. Which was operated on through my verified account at Binance as follows:

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When choosing, the first pair is exchanged for the second, so the exchange is made through a purchase of SLP with the USDT 19.32 I own, at the last Ask price of the moment because it is the lowest price.

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Thus, the second transaction is carried out immediately seeking to take advantage of the market price in a way that does not affect an upcoming change.

So we sell the SLP we got from the first transaction at the last bid price, in order to have the ETH needed to complete the triangle.

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Finally, having the necessary ETH, we complete the triangular arbitrage strategy by placing a sale order at the last Bid price of this crypto so that we have USDT again as a result.

Thus, at the end of this strategy, it is observed that the lower priced assets can be offered upwards, while the higher priced assets are sold.

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However, it is noted that the resulting value of USDT is less than the initial investment despite having operated simultaneously, as $19.32 was invested and $18.91 is obtained so there is a loss of $0.44 , which is attributed to the commission charges required by the exchange in question.

Therefore, as mentioned above, it is important to take into account the transaction costs that are charged because it is not a large enough investment, the benefit gained in the strategy is lost in external expenses.

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Advantages and Disadvantages of the Triangular Arbitrage method

Finally, it can be said that arbitrage in trading is considered relatively low risk, however it does not ensure that profits will always be in full. Therefore, in mentioning this type of arbitration, I consider that one of its disadvantages is the volatility in the cryptocurrency market, since capital can be invested at a certain time and in a certain cryptocurrency, However, transactions involving arbitration may not be fast enough and therefore result in losses.

On the other hand, another important point that is often ignored are the costs of services and commissions in low-investment operations, since our profits could vanish when closing a transaction and paying the commissions with our profit to have a small price difference, so you make a bad profit estimate. Therefore, it is considered a great disadvantage for small investors because having such a narrow cost differential implies having a significant initial investment, and thus obtaining profits in large quantities.

There is also competition, as it is a popular strategy we may not be able to buy and sell the three pairs of cryptocurrencies as planned because more people will take the discrepancy in prices. For this reason it is that the preferred opportunities disappear in a matter of seconds, so you should resort to automated platforms, so that it does not affect the rapid adjustment of cryptocurrencies.

However, it is also important to highlight the points in their favour and the reasons why this type of strategy should be implemented, because among the benefits that operators can obtain with triangular arbitrage is mainly the minimum risk that it represents in the transaction when trading with currencies that are at a beneficial price, So when you sell in the final stage you make a profit. Likewise, these gains can be practically instantaneous when trading with large investments in the market given the characteristics of the activity.

Also, an advantage that can be used in this type of arbitration are the multiple opportunities that exist to choose the ideal pair at the right time to have so many cryptocurrencies currently, which also benefits the efficiency of these markets as this type of strategy makes it possible to determine the price of an asset so that price changes end. That said, thanks to the relatively low risk it presents, triangular arbitrage becomes an efficient way to make profits as long as the trader fulfills what is necessary just as market conditions allow.

This is my Homework Post for Cryptocurrency Triangular Arbitrage || Steemit Crypto Academy S4W4 || Professor @reddileep

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