Triangular Arbitrage in Cryptocurrency: Tips and Tricks
“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.” – Thomas Carper, US-Senator
Personally speaking, I was amongst the confused category of people on the concept of Cryptocurrency. But with a long and painful amount of research, I got the gist of this modern yet not-so-modern concept, which I am going to share in this article. Before all the hype gets a toll on you and with all the peer excitment-pressure gets you to join the clan, it will be safe to know certain things related to Cryptocurrency. So, let’s walk through the story of it.
Firstly and most importantly, what is a “Cryptocurrency”? A cryptocurrency is a digital or virtual currency. As any other currency, cryptocurrency too needs protection from counterfeiting. Their medium of security is Cryptography. Many of cryptocurrencies are decentralized systems based on ‘blockchain’ technology, which is a distributed ledger enforced by a contrasting network of computers. An explicit nature of cryptocurrency, and arguably its biggest allure, is its organic nature; it is not issued by any central authority, rendering it, theoretically, immune to any government interference.
The first cryptocurrency to catch the public’s attention was and still is Bitcoin, which was launched in the year 2009 by an individual known under the pseudonym, Satoshi Nakamoto. But the path to Bitcoin was littered with the corpse of unlimited failed attempts. Few people know that the cryptocurrencies emerged as a side product of another invention. Satoshi Nakamoto, never intended to invent any currency. Well, even though we know the name of the creator which is a pseudonym, his identity still remains a mystery.
Satoshi says that he started coding Bitcoin around May 2007. He registered the domain bitcoin.org in August 2008. During this time, he started contacting a few people by sending them private emails, who he thought might be interested in his product. A little later in October 2008, he publicly released the protocol and then, soon after, he released the initial code for Bitcoin as well. He stayed around for two years, during which he posted a lot of messages on forums, emailed and responded to a lot of people’s concern. By December 2010, others had slowly taken over the maintenance of the project and eventually he stopped communicating with them.
In the words of Satoshi, “Cryptocurrency is a Peer-to-Peer(P2P) network of money sharing”. Now the question aries, “How this works”? A cryptocurrency like Bitcoin consists of a network of peers. Every peer has the record of a complete history of the entire transactions and balance of every account. A transaction is a file that will say, “Charlie gives X bitcoin to Dev”, which will contain the signature of Charlie’s private key(cryptography) for security, obviously. After being signed, it will be broadcasted in the network, sent from peer to every other peer. This is the P2P technology. Simple.
Now comes the important part. The transaction is almost immediately known to to the whole network. But only after a specific amount of time it gets confirmed. Confirmation is a very crucial part of the whole concept of cryptocurrency. As long as a transaction in not confirmed, it will remain incomplete and prone to forgery. Once the transaction is confirmed it becomes the word set on a stone. It is no longer prone to forgery, it is non-reversible, it becomes a part of an unshakeable record of historical transactions of the so-called ‘block-chain’.
Here again, only miners can confirm a transaction. This is their job in a cryptocurrency-network. Principally, anybody can be a miner. For that they have to follow a simple rule set by Satoshi. The rule is that the miners need to invest some work of their computers to qualify for this task. In fact, they have to find a ‘Hash’- a product of a cryptographic function- that connects the new block with its predecessor. This is call the ‘Proof of Work’.
So, this is all that covers the basic concept of Cryptocurrency.
An Introduction to Triangular Arbitrage and How it Works
Now, coming back to our topic, we also need to know about another concept known as ‘Triangular Arbitrage’. Arbitrage simply mean the simultaneous buying and selling of securities, currencies or commodities in different markets or in different improvised forms in order to gain benefit of different prices for the same asset. A person using arbitrage is known as Arbitrageur. Triangular Arbitrage is the act of exploiting an arbitrage opportunity resulting from a pricing discrepancy among the three different currencies in the foreign exchange market.
The precedent question is “How does Arbitrage works in Cryptocurrency?”. Since Arbitrage is done by a difference in trading volumes between two different markets, in a market where’s there is a limited supply of a particular coin, it will be more expensive. By purchasing from the former and instantaneously selling on the latter, traders, theoretically, profit from the difference. The most famous example of crypto exchange pricing difference was a phenomenon known as “kimchi premium”.
The most basic way to approach to cryptocurrency arbitrage is to do everything manually. You have to monitor the markets for price difference and place your trades and transfer funds accordingly. It is worth pointing out that hedge funds are increasingly moving into the cryptocurrency world. There are multiple strategies that the traders use to make profit, of which these are some:
a. Simple Arbitrage
b. Triangular Arbitrage
c. Convergence Arbitrage
Hence, Cryptocurrency Arbitrage is the process of profiting from the price difference in two different markets, i.e., buying from one region and selling in another. The strategy of the ‘Triangular Arbitrage’ is that it attempts to profit by triangulating the arbitraging of coins by purchasing 3 different coins based upon a per-determined process of calculation.
How to do Triangular Arbitrage in Crypto Exchange like Binance?
Binance is one of the largest cryptocurrency exchange in the world. Binance coin is the digital currency of the Binance stage. It is an exchanging stage only for the cryptographic form of money, which means you can exchange digital money against each other. Now, for a coin to get added in the BInance’s list is very difficult. The process begins through a Google Form that require a signature for a Non-Disclosure Agreement. The form must be filled out by the CEO/Founder/Co-founder of cryptocurrency. The complete process is entirely anonymous and behind-close-doors on Binance’s side.
Once you have an account on Binance, you can deposit and withdraw your fund. You can always transfer Litecoin(LTC) into exchanges and then transfer into Bitcoin(BTC). After going to the Exchange option, you can easily buy or sell your coins. For triangular arbitrage, you simply have to keep track of the prices in different regions and as per the changes in price and demand, you can buy and sell your coins to gain profit.
Is Triangular Arbitrage Profitable in Bitcoin Trading?
Let’s talk about profits now. Profiting in standard cryptocurrency is easy. You buy Bitcoin in one exchange and sell in another when there is a difference between the two exchanges. Here, two currencies are involved- Crypto currency and Fiat currency. But in Triangular Arbitrage, three currencies are involved- 2 fiat currencies and 1 crypto currency. Believe it or not, you can make a huge amount of money through this strategy. But, it is not simple or easy. You will need bank accounts in two countries, cryptocurrency exchanges in two countries and those counties should have favorable capital controls so you can convert and wire transfer your money. And finally, by applying the strategy you can profit a good amount. The strategy is:
- Buy Bitcoin in Exchange ‘X’ in USD
- Sell Bitcoin in Exchnage ‘Y’ and make EUR
- Convert EUR to USD and transfer USD back to Exchange ‘X’.
I hope this covers the basics of triangular arbitrage in cryptocurrency. Before investing in this, there are certain things you have to keep in mind. As every thing has both effects and side effects, triangular arbitrage in cryptocurrency too has its own couple of benefits and risks. Benefits includes:
- It is a fast way to earn profit
- Huge range of exchanges are available, etc.
Some of the risks include:
- The exchanges can get hacked.
- Fees will be charged during depositing or withdrawing your funds.
- Know Your Customer(KYC) regulation may create problem on entry too many exchanges.
- The competition risk is very high as gradually all the traders are becoming aware of the concept, etc.
Key things to keep in mind while doing Triangular Arbitrage in Crypto Exchange
There are certain key things that you should consider before involving yourself in this cryptocurrency sphere.
- Monitor the market of cryptocurrency because there is a greater chance of price differences during the periods of market volatility.
- Use only the trusted exchanges. Research well before investing in any of the exchanges.
- Protect yourself against the sudden market moves, specially the ones which are not in your favor. It’s worth reading up on hedging strategies and how to use them.
- Do not use only a single exchange to store your funds for a longer period of time, which will make it prone to hacking. Keep spreading your money. This will minimize the risk.
The Future of Bitcoin Arbitrage or Cryptocurrency Arbitrage
What is the future of the cryptocurrency arbitrage, now, if you ask. Cryptocurrency is not controlled by any Government. How do you think the Government reacts to it? We hate the things that we don’t understand or can’t control. Many of the countries have banned their banks to invest in cryptocurrencies. India is one of those countries.
Certain other complications that cryptocurrency arbitrage is currently facing are that if your computer crashes, the entire history of the transaction will get erased, your hard earned funds can be easily hacked by any hacking expert. But such kind of problems will eventually will be solved. A bit grave problem is that the more people get to know about it, the more rules and regulations it will attract, which will erode the fundamental premise of its existence. While the number of merchants are increasing, they are still in minority. For cryptocurrencies to become more popular, they have to first gain widespread acceptance among the consumers.
A cryptocurrency that aspires to become a part of the finance mainstream have to satisfy a widely divergent criteria. It have to be mathematically complex to avoid hacking but easy for the customers to understand, decentralized but with adequate consumer safeguard and protection, and preserve users anonymity being a felon. These are the small part of the conditions of criteria to satisfy. I can’t be sure that cryptocurrency arbitrage will be widely accepted in few years’ time but there is a little doubt that as the leading cryptocurrency at present, Bitcion’s success in dealing with challenges it faces may determine the fortunes of other cryptocurrencies in the years ahead.
Wrapping Up: Success Stories of Crypto Arbitrage
If we talk about success stories, there are a tons of it.
Joostbin, in Reddit says, “Picked up 1 BTC at $15000 sold at $15500 after $498 transaction costs I had $2 USD profit. That’s a quick buck for 9 days of waiting for it to get into my bankaccount”.
Again, Introvertidentity says in Reddit, ”
I had a buddy excited about bitcoin about a year ago when the price dropped to around $600. He bagged me for months, and finally in March, he got me to sign up for Coinbase. I bought my first crypto…it was ether at $45. I wanted 10 ether by the time it hit $75, but I didn’t quite make it. I’m a little short of that goal. But, I’m up at 200% in gains in ether alone.
When Coinbase started with Litecoin, I decided to make it my focus. I wanted 21 Litecoin by year’s end. I’m a little above that goal. That investment is now at 490% in gains of value with Litecoin.
One evening back around July, I had another buddy who was on the fence with crypto. Instead of tipping him in cash (he is a server at a nearby restaurant), he agreed I could tip him in Litecoin. Needless to say, that has done him well.
I became a godfather back in October. I gifted 2 Litecoin to my goddaughter. Her baptismal gift Is now up almost 400%.
Whether any of this lasts remains to be seen. But I haven’t invested more than I can lose. If it all goes away tomorrow, I’ll regret the loss of potential, like I did when I traded my 10,000 EMC2 for Litecoin. Yeah…that one still stings. And I had 2000 xrp at one point too.
Lesson: if you believe in the coin…hold. That’s why I’m an investor now…not a trader”.