Exploring the so-called ‘3-way arbitrage'trading strategy on Binance crypto currencies. Is this hype or is it profitable?
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 using a ridiculously simple bartering scenario. When 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 then she trades for 12 almonds.
She has profited 2 almonds through these trades due to anomalies in the exchanges.
Above is exactly the same form of 3-way arbitrage with crypto arbitrage currencies.
What at first seems to be simple often is frequently not.
A couple of 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 located it must be executed quickly or you will be left by having an incomplete execution (1 or 2 trades as opposed to 3)
- the trades must be done as a Limit-Order at the specific 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 in our code)
There's another key thing to know about arbitrage trades but we'll enter into that once we've covered more details…
Broken triangles?
The data above proves a hint, because another line did not show exactly the 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 a trade for AR might not have. We can't be sure with only this information.
It's possible any particular one second later the USDT / BTC exchange was no longer available at the limit price: BTC / USDT: 0.00002973 however now that we have the BTC perhaps the residual 2 trades continue to be possible. We simply cannot know this when 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 limit order (a ‘Taker') is not instantaneous, it might take another 500ms+ to return 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 that instant so you'll find so many ways an arbitrage execution may fail to complete.
