Crypto Arbitrage

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 discover favorable exchange rates and voila! Profits in seconds and no contact with volatility.

How does this work?

Let's break this down employing 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 every 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 due to anomalies in the exchanges.

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

What initially seems to be simple often is frequently not.

A couple of important things to see in the real-world of crypto markets:

• price discrepancies between markets are anomalies, they have to be sniffed out deliberately
• once an arbitrage opportunity is available it must be executed rapidly or you will be left having an incomplete execution (1 or 2 trades as opposed to 3)
• the trades must be done as a Limit-Order at the particular price identified in the arbitrage exploration (we'll try this out in a bit)
• transaction fees will begin to erode the profitability of those trades (we'll examine this directly within our code)

There's another key thing to know about the arbitrageur trades but we'll enter that after we've covered more details…

Broken triangles?

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

It's possible that one second later the USDT / BTC exchange was no longer offered at the limit price: BTC / USDT: 0.00002973 nevertheless now that we have the BTC perhaps the residual 2 trades remain possible. We simply cannot know this whenever 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 can be found in Japan. A control order (a ‘Taker') isn't instantaneous, it might take another 500ms+ to return so our total time for 3 limit orders could realistically extend out to ~2secs. Obviously there may be some inability to execute a limit order as specified in that instant so you'll find so many ways an arbitrage execution may fail to complete.