Trading with Wingz - Steem Dollar Arbitrage… From the Perspective of a Lemonade Stand

This is the beginning of a series of posts, released every now and then revolving around trading. I've been professionally trading commodities for around 5 years and cryptos for 2 years. My main goal is to build up the trading tag, help other traders get their voices heard and take a few steps in the right direction for the trading community here on Steemit :)

So what the heck is arbitrage?  

It's a pretty weird word, not commonly used in drunken social conversations… what it means at a basic level is buying something for less and then immediately selling it for more. Sounds good right?   

The Lemonade Stand  

Let's take a wild, crazy situation of madness… a couple of entrepreneurial kids selling lemonade. These are modern kids that can communicate instantly with each other with their phones, but they're in different locations. One of them; let's call him Bill, is in a location where there are loads of thirsty customers, they're willing to pay top dollar for their lemonade. The other kid is called Paul, now Paul is in a bad location, his customers want to pay less than Bill's customers… however he's right next to the lemonade factory and can snap up some fantastic deals.   

(from pixabay)

So Paul and Bill get on the phone with each other..   

"Yo Bill these guys are selling me lemonade at 146!"   "No f******g way Paul, there's a guy here that want's to buy it at 152s"   

"Ok Bill, you sell that lemonade, I'll buy the same amount here and we'll make mad monies.. Instantly"  

"For sure Paul, I'll send you the profits so you can buy it cheaper there and we'll keep doing this until we're rich"   

Now in this particular case the two kids are actually exchanges… Paul is Poloniex and Bill is Bittrex. For some reason at the moment, you can buy cheaper on Poloniex and sell for more on Bittrex. Sometimes the prices on exchanges are very different, you can buy on one, transfer and then sell on the other for a few % return. If you want it to be instant and 'real arbitrage', you need to have what you want to sell (Steem Dollars) at the exchange with higher prices and what you want to buy (bitcoin) at the exchange with lower prices.   

A quick example of how the exchanges differ as of (15:34 GMT today)

I can queue on Poloniex for 146, once that’s filled I can either transfer it over to Bittrex to sell on the bid at 148 or (preferred) already have it on Bittrex and instantly execute for a small profit. This isn't the best example, but there are times when the gap is much larger.

So why is this the sort of trade a professional is likely to put on?   

Firstly we already have a price that ranges, meaning it bounces back and forth between higher and lower prices over time. The Steem Dollar is designed to be stable and worth 1 USD. If things really go bad you can convert your Steem Dollars into the equivalent of $1 of Steem at the median price of the upcoming 7 days. So, there's a built in fail-safe. 

The markets are also inefficient, at any time there could be a 3%+ difference in the price of Steem on Poloniex and Bittrex.    

These aspects combined make for a consistent trade.   

A Traders Checklist..

Firstly you check out the charts, where is the lower end of the range?  

  

You put in your buy orders on the cheaper exchange and wait to get filled.   

Then you transfer to the more expensive exchange and you're most likely still up on the trade.   

You then use that 'margin of safety' (the 2-3 % arbitrage) as a stop and put in a sell order towards the higher end of the range, pushing for 5 or 6%.   

If the opportunity is still there to buy on the cheaper exchange you put in another order to buy, knowing that you can immediately sell with the previous order you transferred over.   

You're now in a position of covering yourself if things go wrong by stopping out for breakeven on Bittrex, but waiting for a larger profit… You're waiting for more, trading the range, but you'll settle for less because you'll still make a profit.   

With any high probability trade like this your losers have the potential to be much bigger than your winners. It does however have an edge, a huge edge right now, this is a trade that can be manually done maybe 7-10 times a week. Those 3-6% trades start to add up pretty quickly.

What could go wrong? Disclaimer...

Be smart about this, if Bitcoin starts going up then SBD will go down relative to BTC, regardless of whether the dollar value is getting closer to $1. One of the wallets on the exchanges could go down mid exchange. Volume could dry up and you'll be stuck long. Or the SBD could completely collapse.

I'm not advising anyone to take this trade, just some observations that a trader who knows what he/she is doing could take advantage of.

Happy to discuss this further in the comments below.