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Crypto Arbitrage 

Exploring the so-called ‘3-way arbitrage'trading strategy on Binance crypto currencies. Is this hype or could it be profitable?

Just what a concept! Make 3 trades in rapid succession when you find favorable exchange rates and voila! Profits in seconds and no experience of volatility.

How does this work?

Let's break this down employing a ridiculously simple bartering scenario. Whenever we exchange one crypto-currency for another we're bartering or exchanging fungible assets.

Let's image the next 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 as a result of anomalies in the exchanges.

Above is the same type of 3-way arbitrage with crypto currencies.

What initially seems to be simple often is usually not.

A few essential things to note within the real-world of crypto markets:

  • price discrepancies between markets are anomalies, they need to be sniffed out deliberately
  • once an arbitrage opportunity is located it must be executed quickly or you will be left with an incomplete execution (1 or 2 trades rather than 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 quickly erode the profitability of the trades (we'll examine this directly inside our code)

There's another key thing to understand about arbitrage trades but we'll enter into that when we've covered more details…

Broken triangles?

The information above proves an idea, because the following line did not show the same arbitrage available in 17:00:30 therefore it was gone.Had we initiated a trade for BTC it may have executed but then a trade for AR might not have. We can not be sure with only this information.

It is possible this 1 second later the USDT / BTC exchange was no longer offered at the limit price: BTC / USDT: 0.00002973 nevertheless go now that people have the BTC perhaps the residual 2 trades continue to be possible. We simply cannot know this once we initiate the arbitrage exchange.

Each Binance REST API call takes at least 200ms, depending on where we're located (where your code is running). Binance servers are found in Japan. A control order (a ‘Taker') isn't instantaneous, it could take another 500ms+ to come back so our total time for 3 limit orders could realistically extend out to ~2secs. Needless to say there could be some inability to execute a limit order as specified in that instant so there are numerous ways an arbitrage execution may fail to complete.

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