Introduction

Red Phoenix arbitrage strategy has two phases. In first phase when the prices on two exchanges are far from each other, we earn on the arbitrage. In second phase, when the prices on the exchanges get closer, we lose, but less than we’ve earned in the first phase.

Red Phoenix strategy is well suited for the markets that are consistently above other markets. The price for BTC/USD on some Chinese and Korean exchanges is always higher than on some bigger US exchanges. Usually it is not simple to profit from that. The scenario that I’ve mentioned in Arbitrage strategies – Part I – Loop presents such situation:

Cryptocurrency arbitrage diagram – illusionary gains

This diagram shows how theoretical profit from the arbitrage changes into the loss due to very high withdrawal fees. Red Phoenix arbitrage strategy is built to benefit from situations like this one. In first step we will earn a lot, in second we will lose. The rule is simple – we need to earn more than we lose.

First step – earning

Starting on 5th August 2018, YoBit TRX/BTC price started to be constantly higher than the price of TRX/BTC on Binance. Loop arbitrage has been made pretty difficult due to very high withdrawal fees of TRX on YoBit. This is where the Red Phoenix strategy helped us. Let’s take a look at this chart:

Cryptocurrency arbitrage – YoBit – Binance TRX/BTC

This chart represents the price of TRX/BTC on two exchanges. Red line is BID price of TRX/BTC on YoBit – that means how much BTC you can get for TRX on YoBit. Blue line represents ASK price of TRX/BTC on Binance – that is how much BTC you need to pay to get TRX. Around 17:18 Aug 14th you can see a moment where the difference of these prices is highest:

  • the price with which we can sell TRX on YoBit is 0.00000312 BTC
  • the price with which we can buy TRX on Binance is 0.00000280 BTC

That means that theoretically on each TRX that you buy on Binance you can earn 0.00000032 BTC. That’s a lot. But remember – we need to go through the full loop, we need to have our base funds where they’ve started. That is why we need to do reverse trade.

Second step – losing

Assuming we’ve bought some TRX on Binance and sold some TRX on Yobit, now we need to do the reverse trade. We need to wait for the moment when the prices are the closest. Let’s take a look at this chart:

Cryptocurrency arbitrage – YoBit – Binance TRX/BTC

And a closer look at the moment in the circle:

Cryptocurrency arbitrage – YoBit – Binance TRX/BTC

These charts represent the price of TRX/BTC, but this time, red line represents the price with which you can sell on YoBit, while blue line represents the price for which you can sell on Binance, trading fees not included. Let’s focus on this point at 02:12 on Aug 15th:

  • the price for which you can sell on Binance is 0.00000324 BTC
  • the price for which you can buy on YoBit is 0.00000323 BTC

The caveat here is the charts above represent the ticker prices, where the trading fee is not included and the size of our trade is not taken under account. To understand what is the real price that you will have to pay or receive, you need to apply exchange trading fees and you need to take under account the volume of the orders that are available for the ticker price. Details are explained in the article about cross-exchange order book matching.

So back to our example, it looks like you can profit again, however after applying exchange trading fees and checking the volumes you will lose a bit. In first step we’ve earned a lot, in second step we’ve lost a bit. That is good! Let’s take a closer look at the numbers.

Arbitrage analysis

MultiTrader platform can perform detailed arbitrage analysis. It is using order books for both exchanges to perform cross-exchange order book matching. The analysis below has been performed for the transaction amount of 1000 USD

Cryptocurrency arbitrage – YoBit-Binance TRX/BTC

The chart that you see above represents the gain of the arbitrage transaction that is buying on Binance and selling on Yobit expressed in percents (green line). The red line represents the loss on buying on YoBit and selling on Binance. Loss percent is positive means gain percent is negative.

The circles on the chart represent the two moments that we’ve discussed above:

  • Around 17:18 Aug 14th if we decide to buy on Binance and sell on YoBit, we will earn 7% of the transaction amount (~70 USD):
Cryptocurrency arbitrage – YoBit-Binance TRX/BTC
  • Around 02:12 on Aug 15th if we decide to sell on Binance and buy on YoBit, we will lose 0.3% of the transaction amount (~3 USD)
Cryptocurrency arbitrage – YoBit-Binance TRX/BTC

That means that after those two transactions we will be richer by almost 67 USD!

Detailed analysis

On the chart below we are going to go through the detailed analysis of this situation.

Cryptocurrency arbitrage diagram – Red Phoenix on YoBit-Binance TRX/BTC

We would like to trade with the amount that corresponds to 1000 USD. In first step we are trading 52120 TRX, in second step, as the TRX/USD price has grown, we are reducing the transaction amount to 48790 TRX. Let’s check what are the totals after each step.

Cryptocurrency arbitrage – Gains on YoBit-Binance TRX/BTC

As you can see after the first step, our total amount of BTC has grown by 0,01315463 BTC, the amount of TRX stayed on the same level. That means that we’ve earned around 7,1% – that is around 71 USD. In the second step we’ve lost 0,00039519 BTC, that is around 3 USD (-0,3%). Altogether we’ve earned 68 USD.

Some caveats at the end – after second set of transactions we are not exactly where we’ve started. We’ve started with 53000 TRX on YoBit, now we have 49760. The reason for this is the fact that our transaction size is “indexed” by the TRX/USD. At each step we are performing the trade valued 1000 USD, but the TRX/USD price changes in time, so the amount of TRX that we use for the transaction changes. At first transaction, TRX/USD was 0,01918, at second it has grown to 0,02049. That resulted in different transaction size, our original TRX pool has not been rebuilt. We can say, that is not a problem, as our TRX amount on YoBit corresponds to 1000USD, so we are ready for next arbitrage round. Also, as the price fluctuates in both directions, after next round of arbitrage we may be back in our original position.

Second caveat is about the transaction fee on Binance. It is 0.05%, but only in case we have BNB coins on our account. BNB is a Binance coin – Binance promotes using this coin by reducing original trading fee from 0.1% to 0.05% in case you have BNBs on your account. Trading fee 0.05% is much more convenient for arbitrage, therefore in order to have full pictures on the diagrams above, I should also draw BNB wallet. However, in order to simplify things a bit, all our calculations above were performed as we were paying 0.05% in BTC. In full details scenario we would have to have some BNBs on the account, we wouldn’t pay fee in BTC, but in BNBs. That means that we would have a bit more BTC on our BTC wallet, and corresponding amount of BNBs less on the BNB wallet. I’ve made this simplification to reduce the complexity of this example.

What is important, after summing up our funds across both exchanges/wallets, first set of transactions moves us forward – we earn 71 USD, second step moves us a bit backward – we lose 3 USD, but after both these steps, we are further than where we started, total amount of both coins has grown. We have earned coins worth 68 USD, with the use of coins worth 2000 USD – that is 3.4%, with no exposition to the risk.