Can one earn only converting assets with different spread?

Question

Example:

buy asset Y with asset X (i.e. BUSD/BTC)
buy asset Z with asset Y (i.e. BTC/BNB)
buy asset Y with asset Z (i.e. BNB/BUSD)

and get an earn on X with spread between assets (i.e. gain BUSD).

Is this feasible (such as that spread between BTC and BNB is higher) or impossible in financial world?

This is called arbitrage. Someone with a faster computer than you is already doing this billions of times per day. You won't be able to out-race them. — user253751, Jul 26 '22 at 13:25
@user253751 Someone has to have the fastest computer -- maybe it's him. :) — Barmar, Jul 27 '22 at 15:08
@Barmar not only a better computer but it's also in the basement of the stock exchange, in the rack next to the stock exchange server, because of the speed of light. — user253751, Jul 27 '22 at 15:24
@user253751 Again, what's stopping the OP from being the owner of that computer in the basement of the exchange, other than the cost? — Barmar, Jul 27 '22 at 15:28
@Barmar if that was the case, markzzz wouldn't be here asking this question. — user253751, Jul 27 '22 at 15:43
Oh yeah, totally, markzzz is free to research it, but probably won't get to do it on the stock exchange. Now I just realized this is about cryptocurrency and that field is a whole lot more accessible! There are still people with better connections to miners than you, though. And risk. Especially if you trade between different blockchains that emit blocks at different times. Now if you are doing everything on Ethereum, there is this system called Flashbots... — user253751, Jul 27 '22 at 16:02
Does this answer your question? Can someone make money by cycling through currencies and exchanges? — Flux, Jul 28 '22 at 14:24

score 12 · Accepted Answer · answered Jul 26 '22 at 13:36

12

This is called triangular arbitrage and is not new to crypto - it existed in the currency markets long before crypto. Note that the amount of spread must be larger than the transaction fees to make it profitable.

If the crypto markets are accessible via automated trading platforms (which I suspect they are), then this type of arbitrage is possible but quickly exploited by high-frequency trading algorithms.

answered Jul 26 '22 at 13:36

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Re high-frequency trading and availability: It depends on the cryptocurrency. For example, with BTC, there's one "block" of transactions processed every 10 minutes, so you don't have to be fast, you just have to pay enough in transaction fees that the miners include your transaction in the next block. For ETH, this period is much shorter (12 to 14 seconds), but the idea is basically the same. However, you could probably trade in derivatives off-chain and do it that way instead (or do something like BTC's Lightning Network, which is a near-chain derivative that is eventually settled on-chain). – Kevin Jul 27 '22 at 06:09
@Kevin That may be true for actual BTC mining, but crypto trading between currencies through exchanges works at a basic level the same as what as referred to in this answer. – Grade 'Eh' Bacon Jul 27 '22 at 13:19

score 6 · Answer 2 · answered Jul 26 '22 at 13:42

You are describing the theoretical financial concept of 'Arbitrage', which represents a situation where you can buy something in one market and instantly sell at another market for a premium, with no risk to yourself.

There are basically two potential causes for the appearance of arbitrage:

The markets are immature / with low liquidity, and there are no other traders aware of how take advantage of it. For any markets that are publicly available online, the chance of this existing these days is rare. Fractions of a penny might be available to be scooped up in some cases for a moment in time, but given the automation of trading algorithms, by the time you see theoretical arbitrage yourself as a retail trader, rest assured that the opportunity will soon 'self-correct'.
There are hidden risks or costs that you are ignoring or discounting when comparing costs. For example, does one of your exchanges have some type of ongoing problems? Maybe issues withdrawing cash, etc.? Note as an interesting example here, that some crypto exchanges accept so-called 'stable-coins' as hidden alternatives to USD - in such cases, when something like USDT becomes volatile, some exchanges may display different "USD:BTC" exchange rates, because one exchange trades only in USD, and one [semi-transparently] trades in USD or USDT. Well anyway, that's the joy of trading crypto outside of proper financial regulation, enjoy!

Can one earn only converting assets with different spread?

2 Answers2