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Risk-Free Trading with Cryptocurrencies: Can It Be Done?

By Leverate Technological Trading Ltd (Amram Margalit)ForexMay 17, 2017 04:48AM ET
Risk-Free Trading with Cryptocurrencies: Can It Be Done?
By Leverate Technological Trading Ltd (Amram Margalit)   |  May 17, 2017 04:48AM ET
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Did you know thereis a new application for a method to obtain risk-free profit from trading currencies? Well, involving cryptocurrencies to be exact.It’s a strategy called triangular arbitrage and it’s been around for as long as thecurrency market itself. Triangular arbitrage takes advantage of markets that are out of equilibrium (meaning cross exchange rates are not yet aligned) and its discrepancies offer a trading opportunity that can’t lose if performed correctly. The basic premise is that if a cross rate i.e. AUD/EUR has an inequality to the other related pairs i.e. AUD/USD and EUR/USD, then an arbitrage opportunity exists.

For example, say there’s a drop in the USD due to an unexpected fed announcement. The EUR/USD price goes down to 1.09, the AUD/USD goes to 0.74 and the 0.675 AUD/EUR pair stays the same. A trader might see an opportunity here and would:

  1. Sell 1,000,000 USD to buy EUR and would obtain 917,431 EUR (1/1.09).
  2. He would then sell the EUR to buy AUD which would net 1,359,157 AUD.
  3. Lastly, he would convert the AUD back to USD at a rate of 0.74 which equals 1,005,776 USD.

This hypotheticalfraction of a second round-trip operation would net a profit of 5,776 USD and there is no speculating involved. However, triangular arbitragingschemes are beyond the grasp of the average retail trader as the market’s big boysreact very rapidly to market imbalances. There are highly efficient platforms that run extremely fast and use intelligent algorithms to gain that extra cent as soon as the opportunity presents itself. Retail traders just don’t have access to the technology nor do they have millions of dollars in capital to make the effort worthwhile. In very liquid markets, the opportunity is generally only available to the very first trader who picks up on the imbalance.

But, where this strategy might be now possible is through trading cryptocurrencies. Previously, cryptocurrencies were too illiquid, meaning that the spread between the ask and bid price was too wide to offer a profit. However as virtual currencies like bitcoin start to come up as an acceptable form of payment, triangular arbitrage might appear possible, especially when we see these recent daily 5% swings.

On implementing this technique in my own trading, a quick check before markets open on Tuesday didn’t work out for me: 10,000 EUR gave me 6.211 bitcoins. 6.211 bitcoins gets me 10,372 USD and convert this back to EURI net 9,335. A substantial loss, but it did work out for me a couple of hours ago during a more volatile part of the day.

Where it gets even more interesting is if we can work in other cryptocurrencies into the mix, so for example: we sell EUR to buy bitcoin and then use bitcoin to buy ripple and then use ripple to exchange into physical currencies. With the expanding number of cryptocurrencies available, the possibilities are becoming infinite. However, I’m sure with some patience, good timing (and perhaps the right algorithm), the perfect combination can be found using a triangular arbitrage trading strategy. If it’s worked for you, please let us know in the comments below.

Risk-Free Trading with Cryptocurrencies: Can It Be Done?

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Risk-Free Trading with Cryptocurrencies: Can It Be Done?

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Saulius Pocius
Saulius Pocius Jul 25, 2017 9:38AM ET
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