Steemit Crypto Academy Contest / S13W2 - Triangular Arbitrage

Assalamualaikum everyone!

Welcome to the post. Hopefully, all of you will be doing well and enjoying the time with the grace and blessings of Almighty Allah. Today, I'm here to be a part of the week 2 contest in the SteemitCryptoAcademy community and the topic of discussion is very much interesting Triangular Arbitrage. So, let's start the discussion without any wastage of time.

Explain in your own words, What is triangular arbitrage?

Triangular arbitrage is a actually a trading method that takes advantage of minor price differences between three currencies. It entails purchasing one currency, exchanging it for another, and then exchanging that currency for the original currency, all in a relatively short amount of time. The trader can generate a risk-free profit if the price differences are high enough and transaction costs are low enough.

Consider going to a farmers market and seeing three vendors selling apples, oranges, and bananas. The apple stand sells apples for $1, the orange stall sells oranges for 2 bananas, and the banana stall sells bananas for $0.50. You understand you may benefit by purchasing and selling the fruits in a precise order. You begin by purchasing one apple for one dollar. The apple is then sold to the orange vendor for two bananas. Finally, you sell the two bananas for $1 to the banana stall. You ended up with a profit of $0.50.

Triangular arbitrage in crypto is the same concept as in traditional finance, but it is applied to cryptocurrency. It includes profiting from minute price differences between three distinct cryptocurrencies. We all know that the market of cryptos is very much volatile so it is more beneficial to apply this technique in the crypto space.

Assume the exchange rate between Bitcoin (BTC) and Ethereum (ETH) is 1 BTC to 15 ETH, and the rate between ETH and Tether (USDT) is 1 ETH to 1,000 USDT. This implies that 1 BTC should be worth 15,000 USDT. If a trader discovers that the exchange rate between BTC and USDT is truly 1 BTC to 15,200 USDT, he or she has discovered a triangular arbitrage opportunity.

The trader could begin by purchasing 1 BTC for 15 ETH. The ETH might then be sold for 15,000 USDT. Finally, they may be able to sell the USDT for 1.01 BTC. This would result in a net profit of 0.01 BTC for the trader.

Triangular arbitrage chances in cryptocurrency are uncommon and usually only exist for a limited length of time. This is because price differences will disappear as soon as traders begin to take advantage of an arbitrage opportunity. Furthermore, triangle arbitrage might be dangerous if transaction costs are high or the market is volatile.

Although this type of trading is very risky but still many expert cryptocurrency traders favor triangular arbitrage. There are some benefits that make it an effective way including; Triangular arbitrage allows traders to profit from price differences without taking on market risk. By trading across several cryptocurrencies and exchanges, traders can diversify their portfolios. By minimizing price differences, triangular arbitrage promotes market efficiency.

How to do triangular arbitrage trading?

The method of doing the triangular arbitrage trading is quite simple. To get involved in triangular arbitrage trading in cryptocurrency, follow these steps:

• First of all, you need to find a triangle arbitrage opportunity. This entails finding three coins with disparities in price. You can find these opportunities using a variety of technologies, including cryptocurrency scanners and arbitrage bots.

• Then, you have to determine the profit calculation if you will do the trading arbitrage. You must calculate your prospective profits once you have located a triangle arbitrage opportunity. This includes considering pricing differences, transaction costs, and any other relevant aspects.

• After that, you need to initiate your trades. After calculating your gains, you must execute your trades fast and efficiently. This is due to the fact that triangular arbitrage possibilities might vanish quickly.

• Finally, keep a very close eye on your trades. After you have completed your transactions, you must closely monitor them to ensure that you are profiting. If market conditions change, you may need to adapt your approach or abandon your transactions sooner.

Let's take an example here...

For example, if I have discovered a triangular arbitrage opportunity involving Bitcoin (BTC), Ethereum (ETH), and Tether (USDT). And the following are the current exchange rates:

=> BTC/ETH: 1 BTC equals 15 ETH
=> USDT/ETH: 1 ETH = 1,000 USDT
=> USDT/BTC: 1 BTC = 15,200 USDT

You determine your potential profits. This could be done by using calculator or we can also determine by the brain calculations. For example, if you purchase 1 BTC for 15,200 USDT, sell it for 15 ETH, and then sell the ETH for 15,000 USDT, you will profit 0.01 BTC.

You can carry out your trades. You should carry out your trades quickly and efficiently. This needs having accounts on several cryptocurrency exchanges and being able to swiftly place and monitor orders. So, this is an example of the triangular arbitrage trading.

What is the difference between arbitrage and triangular arbitrage?

The simultaneous purchase and sale of an asset in two distinct markets in order to make good profit from a price difference is known as arbitrage. Any asset, including currencies, stocks, bonds, and commodities, can be used in this manner.

Triangular arbitrage is a sort of arbitrage in which three separate assets are bought and sold in a particular order to profit from a price difference. Triangular arbitrage is commonly employed in the currency market, but it can also be used in other sectors such as the cryptocurrency market especially.

The major distinction between arbitrage and triangle arbitrage is that arbitrage can be performed with any two assets, whereas triangular arbitrage requires three. Furthermore, triangular arbitrage is comparatively more difficult to execute than arbitrage since it needs traders to buy and sell assets in a specified order. Here is a table which explain the difference between these two terms.

Do an example of triangular arbitrage, having 10,000 Steem as the first cryptocurrency. You can choose the remaining 2 cryptocurrencies.

As I have already said that the triangular arbitrage is a very rare opportunity in the crypto market. So, I could not find any appropriate opportunity at this time. But, here is an example keeping in view all the possibilities.

• Assume the following exchange rates are available:

Steem (STEEM) to Tron (TRX) exchange rate: 1 STEEM = 3 TRX

1 TRX equals 0.10 USDT in Tether (USDT).

And, USDT to STEEM conversion: 1 USDT = 4 STEEM

This implies that a triangle arbitrage opportunity exists and we can take the following sequence:

Purchase 30,000 TRX for 10,000 STEEM (1 STEEM = 3 TRX)
These 30,000 TRX is worth $3000 USDT. (1 TRX = 0.01 USDT)
Then, those 3000 USDT are worth 12,000 STEEM.

Profit: 2000 STEEM

• The transaction costs must be considered while calculating your profits. Assume that each transaction applies a 0.1% cost.

10,000 STEEM as an initial investment. Then, 100 STEEM is the transaction fee.

Then, the remaining profit is still: 2000-100 = 1,900 STEEM

I must execute these trades fast and efficiently once I have located a triangle arbitrage opportunity and calculated my winnings. This is due to the fact that triangular arbitrage possibilities might vanish quickly.

Conclusions

The Triangular Arbitrage is a very popular but very rare process in the crypto market. It is actually the process of exchanging three or more crypto assets in different markets if there exist a minor change in the prices of the assets in different exchanges. This is all about converting one asset to other and then to the third and then back to the first one. The calculations of the profit the transactions fees is very much important before adopting this technique.

I would like to invite my friends @malikusman1, @artist1111, and @ashkhan to be a part of this amazing contest.