Any transaction requiring a cross rate will be theoretically priced on the basis of two separate transactions against a common cryptocurrency – usually Bitcoin (BTC).
What is the cross rate?
In the market, most cryptocurrencies are quoted against BTC either on a direct basis (i.e. where the BTC is the base currency) or on an indirect basis (i.e. where the BTC is the variable currency). Naturally, not all cryptocurrency transactions ultimately involve BTC. Therefore, there is a need for what is referred to as a “cross rate”. An (unofficial) definition of a cross rate is an exchange rate between 2 cryptocurrencies, neither of which is BTC.
Calculating the cross rate
Cryptocurrencies are either quoted on a direct basis (where the BTC is the base currency) or on an indirect basis (where the BTC is the variable currency).
- Direct and Indirect e.g. BTC/USDT & ETH/BTC
Example:
On Binance, let us calculate the cross rate for ETH/USDT using the following two rates:
In the cryptocurrency pair ETH/USDT, ETH is the base cryptocurrency and USDT is the variable cryptocurrency. When creating a cross rate from 1 direct and 1 indirect quote the rule is “variable x base”. What does this mean? Multiply the known quoted rate of the variable cryptocurrency (ETH/BTC) by the known quoted rate of the base cryptocurrency (BTC/USDT).
Therefore: ETH/USDT = ($ 9,708.53x 0.032029) = $ 310,95
We can then look up the quoted ETH/USDT price: $ 311.23. This equates to a $ 0,28 arbitrage opportunity. However, this will be eroded after taking into account fees and the volatility of cryptocurrency prices.
I have shown how you can use the cross rate calculation to identify arbitrage opportunities. If you are able to automate this calculation and at scale, there may be more opportunities in the market.
Thank you for learning with me and hope you have a good rest of the day!
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