In cryptocurrency markets, there are a variety of types of arbitrage, with triangular arbitrage is a way to profit from the price difference of cryptocurrencies in different markets or exchanges, though it is possible to profit on the same exchange using the mispricing between different crypto coins. This is deemed to be a relatively low-risk trading option, though, as with any investment one has to way up the potential downsides.
Triangular Crypto Arbitrage In Different Currencies
This works particularly well when you look at cryptocurrencies that are priced in other currencies.
An example of this was the Kimchi premium. The Kimchi premium was the difference between the price of Bitcoin in US dollars on a US exchange, compared to the Korean Won price of Bitcoin that is listed on a South Korean Exchange.
It would work like this.
A cryptocurrency trader buys Bitcoin in US dollars on a US exchange and then sends those Bitcoin to the South Korean exchange. He would then sell the coins for Korean Won and when the Korean Won is converted back to US dollars the trader will get a profit.
This mispricing is also present in other currencies and markets as well as the Korean exchanges.
Triangular Crypto Arbitrage On The Same Exchange
It is also possible to make a triangular arbitrage profit between different coins and this can happen on the same exchange.
This would work like this.
A trader could buy Bitcoin, then with the Bitcoin buy say Ethereum and with the Ethereum buy Litecoin. The Litecoin is then used to buy Bitcoin and the differences in values as a result of mispricing is the profit for the trader.
Many developers have designed bots that can take advantage of mispricing on exchanges. A bot is run that can identify an opportunity automatically and if it is greater than a predefined threshold, buy and sell for you while you sleep.
Things to Remember
A trader needs to have a verified account on each of the exchanges they want to trade on. You will also need to consider waiting time on the smaller exchanges when moving money from them. On the larger exchanges such as Kraken, Binance or Bitstamp this is less of a problem.
Exchange liquidity can also be something to consider when completing orders and a delay of minutes or even hours can have an impact on available profit.
Fees and Taxes
Nothing is free and as such fees will apply to your trading activities, but what are they?
- Deposit and withdrawal fees
- Transaction fees
- Cryptocurrency withdrawal and deposit fees
Fees can reduce profits substantially and it would be sensible to look to ways of mitigating the impact of fees.
Check the tax laws that are applicable to your country of residence and consult a tax specialist to determine how your countries tax laws view cryptocurrencies.