Triangular Arbitrage – How Do You Maximise Your Profits Using This Tactic?
Cryptocurrencies started with a simple goal – making transactions quick and cheap. However, over the years, they turned into rich investment options, which is largely attributed to their volatile nature. So, investors started to explore the opportunities to increase their profits. In this constant research and development, arbitrage appeared as a controversial yet lucrative tactic. Some claim that it is an illegal practice because it entails manipulation and the short holding and selling of assets, while others argue that it is utterly buying and selling, which is the core of trading.
However, there is no doubt that it is one of the safest and fastest ways to secure some gains in the market that requires careful analysis and research.
Some traders expand this tactic to a triangular arbitrage to maximise their profits using three instruments of the same class. Let’s review this approach and how to use it for your benefit.
Defining The Arbitrage Concept
Arbitrage refers to capitalising on natural market dynamics and imperfections, especially between regions and economies. The arbitrage strategy entails buying one asset from market A and selling it at a higher price in market B.
Markets move consistently, and some differences happen between marketplaces for economic, political and technological reasons. This occurrence can be found in securities that sell on different exchanges.
For example, Apple sells its stock in the US market (NASDAQ exchange) and the UK market (LSE). The buying and selling prices in these two marketplaces may differ slightly due to various factors.
Thus, a trader may buy Apple stock or any other security that sells in two locations, buy it from one market and sell it at a higher price in the other.
What is The Triangular Arbitrage?
Triangular arbitrage takes this tactic further by adding a third asset to implement this trading strategy. Triangular arbitration, whether fiat or virtual money, Forex or cryptos, is common in the currency market.
Currencies can be easily exchanged against each other in the same market without looking across borders or in different locations. Thus, traders can find a combination of three currencies and find arbitrage opportunities that make them some gains.
Triangular Arbitrage Using Fiat and Cryptos
There are hundreds of currencies in the foreign exchange market, and a trader can find any combination of three currencies and engage in an arbitrage trade, buying currency A, then buying B, and selling it for C.
This trade aims to end up with more money than initially spent to buy currency A. For example, a trader can buy USD, exchange it for EUR, and then buy some GBP using the resulting Euros. Finally, the trader would sell the GB Pounds back to the USD.
Similarly, with cryptocurrencies, a trader can find three cryptos that offer a massive opportunity, such as USDT to BTC, then BTC to ETH, and then using the resulting ETHs to buy USDT. If this trade results in more USDT than initially used, it is a successful and quick arbitrage trade.
Conclusion
Several different arbitrage approaches exist, such as triangular, kimchi premium, etc. Among these, arbitraging three currencies is beneficial to locate and make some quick gains. However, this requires thorough research and knowledge to find the profitable combination and execute the trade in a timely manner before the market adjusts itself.
