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Stablecoin arbitrage strategies

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Satoshi&Co Daily Crypto Newsletter

February 6 · Issue #120 · View online
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Check out past issues of the newsletter along with more interesting crypto content as well as short (but great) conversations with leading crypto industry participants at our newly-launched website

Recently, we announced the launch of our stablecoin relayer ForDeX. The goal behind building a  relayer is to serve the rapidly growing crypto community by providing a platform to trade in a peer-to-peer trustless manner, where users always have access to their private keys. This is especially true in a scenario where centralized exchanges are getting hacked on an almost-daily basis.
The increasingly growing number of stablecoin projects and the price guarantee that stablecoins are expected to provide is creating multiple kinds of price arbitrage opportunities. For beginners, price arbitrage refers to price inconsistencies for the same asset on different exchanges. For example, Bitcoin’s price on Coinbase and Gemini are not always exactly the same; there is usually a small price difference between the two exchanges. A trader can profit by buying BTC on an exchange trading at a lower price and selling it on a different exchange trading at a higher price. Most arbitrage trades are zero-risk trades as the buying and selling almost happens simultaneously, or over a very short period, leaving the trader immune to price movements. In traditional asset classes, most of the price arbitrage is exploited by quants and HFT traders who deploy sophisticated, lightning speed trading strategies to capture the price arbitrage spread. However, with a relatively less number of quantitative traders in the fledgling crypto trading ecosystem, these price arbitrages are significant in some cases.
Stablecoin-to-stablecoin trading is relatively new to the crypto world and only a handful of centralized exchanges, besides ForDeX, offer stablecoin to stablecoin trading pairs, resulting in exciting trading opportunities for arbitrageurs. Let’s take a look at a couple of such sample strategies below.

USDC/PAX on Binance and PAX/USDC on ForDeX
USDC/PAX price on Binance - 1.00
PAX/USDC price on ForDeX - 1.00092  
Arbitrage trade flow: a) Buy 1 USDC for 1 PAX on Binance
b) Move PAX from Binance to ForDeX
c) Buy 1.00092 PAX for 1 USDC on ForDeX
By the following the above path of trades, an arbitrageur started with 1PAX and ended up with 1.00092 PAX at the end of two trades, capturing a price spread of  0.09% with zero risk.
USDC/DAI on ForDeX and DAI/USDC on Coinbase Pro
DAI/USDC price on Coinbase Pro - 0.98
USDC/DAI price on ForDeX - 0.9998  
Arbitrage trade flow: a) Buy 1.02 DAI for 1 USDC on Coinbase Pro
b) Move DAI from Coinbase Pro to ForDeX
c) Buy 1.02 USDC for 1.02 DAI on ForDeX
By the following the above path of trades, an arbitrageur started with 1 USDC and ended up with 1.02 USDC at the end of two trades, capturing a price spread of  2% with zero risk.
These are just a couple of examples of possible arbitrage. It is probably safe to assume that such arbitrage opportunities will disappear at scale, but for the near future, there is definitely profits to be made for the enterprising trader, in a fairly capital efficient manner.
Meanwhile in Crypto Wonderland....
“Kraken Acquires Crypto Facilities”
Kraken, the US cryptocurrency exchange, has made its largest acquisition to date, pushing into futures trading with the purchase of London-based Crypto Facilities. Under the deal, Kraken said it had paid “nine figures” for Crypto, which lists futures on many of the most popular cryptocurrencies such as bitcoin, ethereum, ripple, XRP, litecoin and bitcoin cash. The agreement underlines industry determination to press on building market infrastructure to attract institutional investors such as hedge funds.
“[Unconfirmed] FB Acquires Smart Contract Firm”
Facebook’s crypto division has reportedly made its first acquisition, quietly onboarding most of the research team from a blockchain startup that specializes in smart contract development. News outlet Cheddar reported that Facebook acquired Chainspace, a blockchain firm founded by University College London researchers and was more interested in the firm’s research team than its technology.
“Venezuela Crypto Bill Now Active”
Venezuela’s new crypto bill, which establishes а legal framework for the industry, has officially come into force. The decree was published in the government’s official media outlet, Gaceta Oficial. The set of rules for miners, crypto entrepreneurs and regular traders was initially approved by Constituent National Assembly. The document gives short definitions of key crypto terms, such as crypto assets, blockchain, mining, cryptography, etc. and also introduces the concept of a sovereign crypto asset — any currency issued in Venezuela and authorized by the government.
“CZ: Amazon Cannot Avoid Crypto”
Changpeng (CZ) Zhao, CEO of Binance, confirmed that he still believes online retail giant Amazon cannot avoid issuing its own altcoin. Discussing the internet business sector more broadly, CZ said it was not so much a question of if, as of when Amazon will issue its own coin ince crypto is easier, faster and cheaper to integrate than traditional payment gateways and requires less paperwork. The retail giant has made efforts to adopt forms of blockchain technology in the past, but its relationship with cryptocurrency remains tied to rumors.
Crypto Twitter Pick
Jameson Lopp
If Bitcoin is a new form of life:
* Electricity is its food
* The Internet is its circulatory system
* Miners are its hearts
* Blocks are the heartbeats
* Full nodes are the white blood cells
* Human participants are the brain cells
What We Are Reading / Listening To
Overnight Performance of Top 10 Currencies
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This newsletter does not constitute an offering of securities in any jurisdiction. The contents of this note should not be construed as investment advice or as a recommendation to purchase securities. This note is intended for the consumption of the recipient alone and not for public distribution. Please consult a certified financial advisor or other appropriate practitioner as may be appropriate as per your jurisdiction.
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