Exploring the so-called ‘3-way arbitrage'trading strategy on Binance crypto currencies. Is this hype or can it be profitable?
What a concept! Make 3 trades in rapid succession when you find favorable exchange rates and voila! Profits in seconds and no connection with volatility.
How does this work?
Let's break this down utilizing a ridiculously simple bartering scenario. Once we exchange one crypto-currency for another we are bartering or exchanging fungible assets.
Let's image these scenario:
- Jane has 10 almonds
- Will has pineapples and will trade each for 5 almonds
- Christine has mangoes and will trade evenly for a pineapple
- Xavier has almonds and will trade 6 for each mango
So in this arbitrage opportunity, Jane trades 10 almonds for 2 pineapples, and these for 2 mangoes which in turn she trades for 12 almonds.
She has profited 2 almonds through these trades because of anomalies in the exchanges.
Above is the same type of 3-way arbitrage with crypto arbitrage currencies.
What at first is apparently simple often is often not.
Several essential things to see in the real-world of crypto markets:
- price discrepancies between markets are anomalies, they need to be sniffed out deliberately
- once an arbitrage opportunity is found it must be executed quickly or you will soon be left by having an incomplete execution (1 or 2 trades as opposed to 3)
- the trades should be done as a Limit-Order at the precise price identified in the arbitrage exploration (we'll try this out in a bit)
- transaction fees will start to erode the profitability of these trades (we'll examine this directly in our code)
There's another key thing to know about arbitrage trades but we'll enter into that when we've covered more details https://ggmoneyonline.com/academy-of-arbitrage/…
Broken triangles?
The information above proves a hint, because another line did not show the same arbitrage available in 17:00:30 therefore it was gone.Had we initiated a trade for BTC it will have executed but then a trade for AR mightn't have. We can't be certain with only this information.
It's possible any particular one second later the USDT / BTC exchange was no further offered by the limit price: BTC / USDT: 0.00002973 however now that individuals have the BTC perhaps the residual 2 trades remain possible. We just cannot know this once we initiate the arbitrage exchange.
Each Binance REST API call takes at least 200ms, according to where we are located (where your code is running). Binance servers are available in Japan. A limit order (a ‘Taker') is not instantaneous, it usually takes another 500ms+ to go back so our total time for 3 limit orders could realistically extend out to ~2secs. Needless to say there may be some inability to execute a control order as specified for the reason why that instant so you'll find so many ways an arbitrage execution may don't complete.
