Triangular Arbitrage
Triangular arbitrage is the practice of exploiting price discrepancies between three cryptocurrency assets in a market.
What Is Triangular Arbitrage?
Arbitrage trading is a financial strategy that exploits temporary price differences of an asset on different marketplaces. In crypto, it entails buying a cryptocurrency on one exchange and quickly selling it on a different exchange to profit from the price difference.
Triangular arbitrage is a more complex type of crypto arbitrage. It refers to the practice of profiting from small price differences between three different digital assets. In other words, it is the process of moving funds between three or more cryptocurrencies to capitalize on the price difference of one or two cryptocurrencies.
How Does It Work?
This strategy entails performing a series of trades between three cryptocurrencies in a triangular formation. It involves three trades: an initial cryptocurrency is exchanged for another, the second crypto for a third, and lastly converting the third crypto for the initial. Ideally, it ends in a profit and the entire series of trades is executed on a single crypto exchange.
For example, assume you have spotted an arbitrage opportunity of pricing imbalance between BTC, USDT, and ETH, and you’re holding 20,000 USDT (initial currency). You can move your funds between three crypto trading pairs – USDT to BTC, BTC to ETH, and finally ETH to USDT. If there are any price discrepancies between the trading pairs, you end up with more USDT than you initially held.
Arbitrage traders look for opportunities where trading asset A to asset B to asset C yields higher profit than trading directly between asset A and asset C. Since the price discrepancy between the assets may be small, arbitrageurs can perform this series of trades several times to make a significant profit.
Due to the volatile nature of crypto markets, triangular arbitrageurs must execute these trades quickly to reduce slippage risks. They are also more complex and time-consuming compared to regular crypto arbitrage. Therefore, most traders utilize trading bots to automate the triangular arbitrage process.
