Greetings everyone, I welcome you all to week 4 of this season’s lesson being given to us by prof @reddileep with a great topic cryptocurrency triangular arbitrage. Below I will be explaining to you all the homework questions.

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Question 1

Define Arbitrage Trading in your own words.

Arbitrage Trading

This is a low-risk investment strategy whereby it depends on the price difference of assets in order to make short term investments. The aim of this arbitrage trading is by providing low risk-based trading by buying assets at lower prices and selling them at a higher price so as to make profits. This procedure can be achieved by swapping coins on an exchange or can be done between exchanges. This arbitrage trading is usually carried out between assets that are similar and that are being traded on separate exchanges.

This process of arbitrage trading needs a lot of experience so as to be able to make use of the opportunities, as it entices one to be very keen to be able to spot a slight price difference the exchanges of the same assets or being able to see the profit between the prices of crypto assets which are listed and then take the advantage of doing the exchange at once.

The process of arbitrage trading also requires a very good starting capital this is because the investment is a short-term one and with small capital, the profit which might be realized will not be wealthy of such risk of the capital.

Question 2

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

• Triangular Arbitrage

This is an arbitrage trading strategy that involves a three-step exchange operation whereby three assets are being exchanged simultaneously within an exchange platform due to a difference in the prices of the assets as they are traded with each other. The idea of this triangular arbitrage trading strategy is the focus on the price difference as crypto assets are being traded by buying an asset at a cheaper price so as to involve the asset at the final trade at the start of a new trade where the asset will gain an extra value that the original value.

• Exchange Arbitrage

Exchange arbitrage is a process that occurs as a result of the difference in the exchange rate of the same crypto asset. That is different exchange site gives different prices of the same assets, this is caused by the volume, liquidity, price spread, and the rate of their exchange flow activities. With this trading type, traders must be keen enough and done research on these exchanges and be able to notice the price difference between a particular asset and time. Traders buy assets on exchanges with low prices and sell them on exchanges with higher prices so as to make profits.

For example, comparing the price of BTC/USDT on two exchanges that Binance and Coinbase I realize the price of BTC/USDT was $47581.16 on Binance and that of Coinbase was $47557.32 as seen on the screenshot below

Screenshot from both Binance and Coinbase collage.

From above, a trader can buy BTC/USDT from Binance at a cheaper rate and sell it on Coinbase at a higher rate to make a profit of $23.84.

• Merger Arbitrage

Merger arbitrage is also known as risk arbitrage is a type of arbitrage trading that results from acquiring or merging a company. Here, traders capitalize on buying shares of the company at discount rates before the process of merging is made and these opportunities are available because of the uncertainty and fear covering the buying or merging process of the company if it will succeed or not that's the reason it is considered a risky trading strategy.

Question 3

Explain the Triangular Arbitrage Strategy in your own words. (You should demonstrate it through your own illustration)

Triangular Arbitrage

From above, a Triangular arbitrage trading strategy is a strategy that involves a three-step exchange operation whereby three assets are being exchanged simultaneously within an exchange platform due to a difference in the prices of the assets as they are traded with each other. The idea of this triangular arbitrage trading strategy is the focus on the price difference as crypto assets are being traded by buying an asset at a cheaper price so as to involve the asset at the final trade at the start of a new trade where the asset will gain an extra value that the original value.

Image design from Polish

From the above diagram, Assume a trader has 500STEEM and spotted have a triangular arbitrage between STEEM to BTC to ETH and then back to Steem wherein he makes a profit.

The trader starts by selling his 500STEEM to buy BTC which he gets approximately 0.06153 BTC for the 500STEEM purchase

Then he proceed to buy ETH by selling the 0.06153 BTC he had acquired. Now the exchange rate of buy ETH with BTC is at 14.45, so now selling 0.06153 BTC to buy ETH which will be 0.089 ETH

In order to complete the triangular arbitrage, the trader has to sell the ETH acquired to purchase back STEEM. And the exchange rate for ETH to STEEM is 0. 00015597 thereby selling ETH we get an equivalent 549.96 STEEM making a profit of 49.96 STEEM.

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 prices)

Exchange Arbitrage

The illustration below will show how I used the Binance Exchange and Poloniex Exchange. After noticing an arbitrage difference in the price of Ripple on the above-listed exchanges with Binance listed price of Ripple at 0.9158 while the Poloniex listed price of Ripple is 0.917.

I then place a buy order worth $100.7 of Ripple which was equivalent to 110 Ripple. And there was a slight difference in price due to price movement.

Screenshot from Binance

When the order was confirmed, I then withdraw the Ripple to my Poloniex Exchange wallet quickly to avoid any drop.

Screenshot from Binance

The exchange rate of Ripple was $0.917 on the Poloniex Exchange wallet and the profit realized after selling was

Screenshot from Poloniex

screenshot from Poloniex

Profit gained from exchange arbitrage is

Exchange profit = $100.877 - $100.73

           Profit = $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 coins such as BTC and ETH. (Explain how you get your profit after performing Cryptocurrency Triangular Arbitrage Strategy, you should provide screenshots of each transaction)

Triangular Arbitrage

Here I will be using the Binance exchange and the three cryptos are USDT, BTC and Ripple

I will begin by making a purchase of 55XRP using 50USDT at an exchange rate of $0.9055.

Screenshot from Binance

Screenshot from Binance

After which I proceed by selling XRP as a pair XRP/BTC in order to acquire BTC with the exchange rate of XRP being 0.00002189 which I will get 0.0011839 BTC.

In order for the triangular arbitrage to be completed, I will be selling the acquired BTC in order to buy back the initial crypto which was USDT. And the exchange rate of BTC/USDT is 42600.00 and the amount gotten from selling the BTC to USDT will be $50.27.

From the above explanations between the triangular arbitrage of USDT, XRP and BTC a profit of $0.27 was being realized.
USDT profit = $50.27 - $50.00
Profit = $0.27

Question 6

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

Advantages	Disadvantages
- Triangular arbitrage reduces the risk in trading this is because the orders are being carried out at the same time. Thereby reducing the risks involved in carrying out that transaction.	In a situation where the network fee or transaction fee is high, it may affect the trader in decreasing his profit.
- The triangular arbitrage concept is very easy to understand and can be programmed such that in noticing the triangular arbitrage process a software link can automatically perform the transaction.	In a situation where the prices fluctuate so easily, the trader might end up losing in the trade.
- Profit-making in triangular arbitrage is very quick and fast.	Lack of high capital before entering a trade will lead to a very low outcome or profit.
- This process provides multiple opportunities in which trades can trade at very short time intervals.	If there is any poor strategy or not well understand prices it can lead to a great profit loss.
- Triangular arbitrage is a source of liquidity in the exchanges as well as assets as the providers might be different on both exchanges.	Low liquidity which affects the pricing of an asset and also reducing profit percentage this is because of spread.

Conclusion

Arbitrage trading needs a lot of trading experience and fastness in the execution of trade in order to maintain a good profit and avoid slippage. It is a short term investment opportunity and the different types of arbitrage trading offers a wild range of opportunities to focus on fluctuations and prices changes.

I want to thank prof @reddileep for choosing such a great topic as I have learned about carrying out a good Arbitrage trade.

Cc: @reddileep