August 31, 2021 |James Messi
Many professional traders, hedge funds, and other institutional financial firms make their living through a strategy called arbitrage. This strategy can be deployed across all major financial markets (i.e. forex, stocks, bonds, cryptocurrency).
True arbitrage opportunities are rare and challenging to take advantage of. That being said, the cryptocurrency markets and the platforms that act as the foundation for these markets, are still underdeveloped. Keep reading to find out why that results in more arbitrage opportunities and how to take advantage of them by trading on Beaxy Exchange.
What is Arbitrage?
Arbitrage, in financial markets, refers to the act of buying and selling identical assets across two different markets for different prices. The goal of arbitrage is to generate profits with near-zero risk.
For example, let’s say you are holding 20,000 Tether (USDT) on Beaxy Exchange and 1 bitcoin on Coinbase. In this example, the current price of BTC on Beaxy Exchange and Coinbase is $20,000 and $20,100 respectively. We started out with 20,000 USDT and 1 BTC.
By simultaneously buying 1 BTC on Beaxy with 20,000 USDT and selling 1 BTC on Coinbase for 20,100 USDT, you now have 1 BTC at Beaxy and 20,100 USDT at Coinbase. Giving you an instantaneous and riskless profit of $100.
In reality, most arbitrage opportunities in legacy financial markets are not nearly as obvious and require an automated system to take advantage of them. In the crypto markets, these opportunities are easier to take advantage of as there are fewer big-money firms and institutions to take this profit for themselves.
The relatively small amount of institutions in the crypto markets also contributes to the existence of crypto’s arbitrage opportunities as individual order books for digital assets have much less value on them compared to legacy financial products such as stocks. This allows for a spread to remain between the same asset listed on two different exchanges. It highlights the fact that cryptocurrency markets are still largely inefficient. While that may sound like a drawback, it presents a great opportunity to those with the knowledge and willingness to arbitrage the spread by themselves to increase profitability.
Fiat and Cryptocurrency
Being that cryptocurrencies have only been traded for the last decade, the seemingly endless markets that support them are still inefficient relative to legacy markets for assets such as stocks and bonds. As previously mentioned, much of this stems from an absence of well-resourced institutions that would otherwise bring tons of capital and advanced algorithms to the crypto markets to take this arbitrage profit.
As institutions sit on the sidelines, independent traders have been profiting off of crypto’s inefficient markets for as long as they’ve been around. The most glaring arbitrage opportunities for digital assets are tied to trading pairs that include multiple fiat currencies.
Being that financial regulations vary so greatly from one country to another, moving fiat currency across borders is slow and expensive. This leads to price inefficiencies between an asset like Bitcoin and a handful of national currencies like USD, EUR, or GBP.
Triangular arbitrage is a more complex strategy that has mostly been used in the foreign exchange markets. To take advantage of triangular arbitrage, you need to simultaneously engage with three separate trading pairs instead of two.
While triangular arbitrage is more complex compared to a traditional arbitrage trade, the opportunities may be presented more often. Particularly in digital asset markets where firms like Beaxy provide their traders with access to BTC through USD and EUR. The ability to trade digital assets against different fiat currencies is vital to executing a triangular arbitrage trade successfully.
Follow the example below to see how triangular arbitrage can generate risk-free profits by using a mix of crypto and fiat currencies on Beaxy Exchange.
Triangular arbitrage trading pairs: BTC-USDC, USDC-EUR, BTC-EUR:
In this example, we are starting with a balance of 1 BTC on Beaxy Exchange and 1 BTC is currently valued at 32,000 USDC, 1 Euro (EUR) is trading for 1.18 USDC, and 1 BTC is trading for 26,500 EUR.
The three trades required to make a riskless profit on this setup are as follows:
Sell 1 BTC to get 32,000 USDC
Sell 32,000 USDC to get 27,118.66 EUR
Sell 27,118.66 EUR and receive 1.0233 BTC (27,118.66 EUR / 26,500 EUR)
In the example above, we began with 1 BTC and made three trades simultaneously that resulted in an ending balance of 1.0233 BTC. In this example, the triangular arbitrage made a profit of 0.0233 BTC with very little risk taken.
How to Get Started
Taking advantage of triangular arbitrage in crypto has never been easier. Create your Beaxy account today to get access to major cryptocurrencies through multiple fiat currencies such as USD and EUR. On average, Beaxy’s traders pass KYC in 5 minutes or less!
Once your account is verified, fund it with:
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