Blockchain and Cryptocurrency Advanced - The Triangular Arbitrage Strategy

Triangular arbitrage is basically a trading opportunity that involves a triangle of 3 cryptocurrency pairs. Triangular arbitrage involves a trader capitalizing on price differences between 3 cryptocurrency pairs to make quick profit while taking very minimal risk. For instance, a trader can capitalize on price differences between 3 cryptocurrency pairs such as MATIC/ETH, BNB/ETH and MATIC/BNB to make profit.

To demonstrate this, a crypto trader notices that there is a cross rate difference between MATIC/ETH, BNB/ETH and MATIC/BNB and MATIC/ETH and MATIC/BNB pairs are valued against BNB/ETH. The trader can capitalize on this price difference to make quick profit while taking very minimal risk. Let’s say the value of BNB/ETH is lower compared to both MATIC/ETH and MATIC/BNB, the trader can quickly sell MATIC to acquire ETH, sell that ETH to acquire BNB and sell the BNB to acquire back MATIC. The trader will now have more MATIC. This means that the trader has made profit.

[Design created by me]

From the illustration, we can see the triangular arbitrage clearly represented. A trader already has 5000 MATIC coins in his wallet. The trader discovers that there is a cross rate difference between MATIC/ETH, BNB/ETH and MATIC/BNB. MATIC/ETH and MATIC/BNB are valued against BNB/ETH. Meaning that the value of BNB/ETH is lower compared to MATIC/ETH and MATIC/BNB. The trader capitalizes on the opportunity to make a quick profit.

Price of MATIC/ETH - 0.00037425 ETH
Price of BNB/ETH - 0.1242 ETH
Price of MATIC/BNB - 0.002917 BNB

The trader quickly sends his 5000 MATIC to the exchange for the trading.

Sells 5000 MATIC for ETH** at 0.00037425 ETH
The trader gets 1.871250 ETH

Sells 1.871250 ETH for BNB at 0.1242 ETH.
The trader gets 15.0664 BNB

Sells 15.0664 BNB for MATIC at 0.002917 BNB.
**The trader gets 5,165.03 MATIC

Profit = 5,165.03 MATIC – 5000 MATIC
Profit = 165.03 MATIC

The profit made by the trader is 165.03 MATIC