The rise of cryptocurrencies is one of the largest innovations of the digital age, bringing personal and commercial users a fascinating new way to transfer funds online. Trading cryptocurrencies has become extremely popular in recent years, and investors are keen to leverage the latest technologies to help maximize their performance.
The crypto arbitrage bot is just one option available to them, but what is it and how does it work?
The crypto arbitrage bot explained
Cryptocurrency arbitrage bots operate on a set of rules, designed to conduct automated trades with no requirement for interference from human users. They’re a powerful tool in trading round the clock.
Traders able to create a strategy with the power to achieve profits consistently can free themselves of the strain involved in directing a platform to perform identical processes again and again. But a cryptocurrency arbitrage bot is built to make hundreds, or even thousands, of intricate decisions in the space of time required for mere humans to make one or two.
This is purely algorithm-based trading, and there are no emotional issues to disrupt it. The bots just execute their pre-set strategies as required, time and time again.
Strategy and crypto arbitrage bots
It’s vital that traders define their own strategy before diving into using crypto arbitrage bots for the first time. Essentially, they need to create a clear strategy with an effective risk/ reward in place, and an ability to manage money wisely is fundamental for good trading.
But there’s more to consider to reduce your risk when trading, too. Volumes must be kept low when dealing with a highly volatile pairing, to prevent the uncertainty on the market from damaging your personal investment.
There are certain steps to follow when looking to take advantage of an arbitrage strategy effectively and generate profits from automating the process. Read on to learn more.
Creating the crypto arbitrage bot
When putting the bot together, traders should first gather data on pricing, through popular aggregators and leading exchange APIs. All of this data should be analyzed in detail, so that you can find that which has the highest likelihood of bringing valuable opportunities for arbitrage.
Next, you want to automate your strategy so that the entry and exit time of trades is minimized as much as possible. Finally, it’s important to incorporate a range of pairs and exchanges into the strategy to keep the level of variation high throughout.
Reducing risks in arbitrage strategies
To mitigate the danger of losses, all charges related to conducting trades and making transfers must be kept minimal whenever possible. This helps to ensure that the pricing spread works in your favor, rather than against you.
The next step is to confirm that your liquidity is likely to be high enough for trade sizing across each pair, for maximum effect. If you’re performing arbitrage across exchanges, take the time to confirm that you have put all times and charges related to transactions under consideration.
Be aware that certain irregularities may appear when gathering data, and this could lead to major oversights or mistakes on your part. Especially when you set up trades to be completed automatically based on this information. Take the time to check.
Finally, certain cryptocurrency exchanges charge larger fees for withdrawals than networks’ blockchain costs. They may involve a higher number of confirmations than a lot of cryptocurrency wallets too, so keep this in mind.
Understanding cryptocurrency arbitrage bots’ functionality
There have been several periods during cryptocurrencies’ history in which opportunities for cross-border arbitrage have arisen for traders to take advantage of. Specifically, Korea’s Bitcoin markets created a 4 percent premium on average between 2016 – 18, due to two factors: conflict originating from the Bitcoin network itself, and capital control.
However, arbitrage like this can be hard for traders to use to their benefit, and while it’s a very complex area, we’ll explore it in more depth below.
Recognize when the market is inefficient
Sadly, there’s no one size fits all approach to building a trading strategy that yields massive profits. Even the best bots are capable of only collecting key information on your behalf and conducting trades without your personal input.
So, if you want to pinpoint areas in which a market is inefficient, you can’t waste time scouring various cryptocurrency exchanges yourself. That takes too long and you wouldn’t find the data quickly enough to take advantage of them anyway.
Furthermore, we need to consider more criteria before we can confirm that an arbitrage trade is actually viable. First and foremost, an exchange’s fees must be at a low level if there’s to be a good chance of securing a profit.
For spatial arbitrage, assets tend to undergo fast transfers, and the blockchain’s speed determines the fees and the minimum confirmation number demanded before the trading assets are finally debited. The exchanges, blockchains, and fees involved all affect the speed itself overall.
Gathering data properly
As a trader, you should take the time to collect data related to selling and buying rates. You may want to visit such sites as coinmarketcap.com, which is widely considered one of the most dependable websites for cryptocurrency price-aggregations, listing more than 2000 assets for traders.
Next, just click on the cryptocurrency on which you want to perform arbitrage, and opt to sort the information by price. This will reveal whether there are any significant differences to consider.
Exploring arbitrage strategy in depth
We can use a simple formula to understand an arbitrage trade’s spread. It follows:
Bid (exchange A) – ask (exchange B) = spread
Should a spread continue to rise beyond a trigger value which has already been established, the relevant trade should be triggered. The majority of strategies in arbitrage need the trader to hold both asset amounts across both of the markets involved, before selling and buying at the same time. This occurs almost instantaneously, due to the trade being free of risk.
But with regards to cryptocurrency, the trade isn’t actually free of risk because there’s a high volatility level to consider. However, it can be reduced by using the ‘price risk’: this is the process of holding trades indefinitely, to find opportunities for arbitrage which could lead you to offset profits from trading by quite a large margin.
Crypto arbitrage bots (such as Bitcoin trading bots) utilize this method, transferring assets from one market to the other market. As a result, spot prices may not be adequate, and so another statistical method is necessary to boost the profit margin overall.
What is intra-exchange arbitrage?
Rather than spot prices, there’s a statistical approach used to determine if specific pairs (typically with low liquidity) may present an opportunity for arbitrage. Such opportunities on an exchange between assets with multiple pairs will reduce the trade’s risks, including the likes of fees and transaction times.
This strategy demands a script for iterating through the exchange’s relevant list of pairs, such as public Bittrex API — this doesn’t create graphs next to the iterations, but presents information fast to demonstrate what’s happening with the important data.
What is inter-exchange arbitrage?
You can find the largest spread between Bittrex and Binance using inter-exchange arbitrage. It’s a solid starting point due to the volume and consistency level.
The arbitrage bot operates well only in cryptocurrency markets. It can be difficult to create an effective arbitrage strategy, as it involves considerable technical expertise, but selling cryptocurrencies at rates beyond the worldwide average is a fascinating concept.
The crypto trading bot (including Bitcoin trading bots) is a cutting-edge automated trading system which brings a risk of monetary losses, so traders must take care before implementing it.