AtoZ Markets - Cryptocurrency is the biggest innovation on the internet until now, which has become popular through the creation of Blockchain technology. As the cryptocurrency trading has become very popular, most of the traders and investors are keen to know how crypto arbitrage bot works to make their effort soft and smooth.
What is the Crypto Arbitrage Bot?
The crypto arbitrage trading bots are a set of instructions that execute the trades automatically without any human intervention. The trading bot has some major components regardless of language & framework.
If a trader can build a strategy that can provide the profits repeatedly, there is no need to waste hours inform of the platform to do the same thing repeatedly. A bot can take thousands of decisions while a human brain can think of several. There are no emotions in Algorithmic trading, which can consistently execute the same strategy over time.
The Crypto Arbitrage strategy
Before proceeding further about How Crypto Arbitrage Trading Works, the trader has to set a trading strategy with good Risk: Reward and strong money management. Then compare a few different options to minimize your risk as much as possible. For high volatile pair, the volume should be lower to ensure that the market uncertainty cannot harm the investments.
To use the arbitrage strategies, the trader needs to follow some basic steps to ensure the automation to be profitable.
Building the BOT
- Collect data on price via exchange APIs and price aggregators such as com.
- Analyze and identify the data that can give the most likely arbitrage opportunities.
- Automate the trading strategy to minimize the time per entry and exit of the trade.
- Measure the strategy to include as many exchanges and pairs as possible to increase the variations.
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- The charges from trading and transferring should be minimized to confirm that the price spread is beneficial.
- Check that liquidity will be high enough for the size of your trade on all pairs
- If you are doing inter-exchange arbitrage, check that the network fees and transaction time of the coin you are transferring are taken into account.
- Some exchanges will have higher withdrawal fees than the actual blockchain fees and often require more confirmations than most wallets.
- Many irregularities can occur in real-world data collection, and that could cause disastrous errors, especially automate the trade completely.
How Crypto Arbitrage Bot Works?
In the history of cryptocurrency, there have been periods to produce cross border arbitrage opportunities. A paper from the University of Calgary highlights the possible arbitrage opportunities in Korean bitcoin markets that provided an average premium of 4% from 2016 to 2018. The study classifies two main causes of the premium, one is capital controls, and another is the friction caused by the Bitcoin network.
This type of arbitrage is difficult to exploit. It is something beyond the scope of this article, but worth looking to understand How Crypto Arbitrage BOT Works.
Crypto exchange arbitrage = market inefficiency
There is no Holy Grail to have a very profitable trading strategy of any kind with writing some scripts or bots. This can only assist in information gathering and executing the trades.
To find the market inefficiencies, we cannot waste large amounts of time searching multiple exchanges and pairs of currencies by hand. It could take so long, and we would not be able to find them fast enough to make them work.
Aside from the consideration before building the strategy, we will need some additional set of criteria and heuristics. That is how it will confirm if an arbitrage trade will be possible.
On the other hand, the exchange trading fees should be low for things to increase the probability of profit.
If the trade is spatial arbitrage, the asset will transfer very quickly. The speed of the blockchain will determine this with TX fees, and the minimum amount of confirmations are required before debiting the trading assets.
The speed will depend on exchanges & blockchain used and the fees set.
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To know the data of buying and selling rates, the user must use the websites that provide that data, like coinmarketcap.com. It is one of the reliable prices aggregating websites in crypto with over 2000 crypto assets listed.
After going to coinmarketcap.com, the user should click on the currency that would like to do arbitrage on. Then after pressing the exchange tab, click “sort by price” to see if there are any major differences. It should look like this.
The spread of an arbitrage trade is defined by the calculation mentioned below:
Bid (exchange A) - Ask (exchange B) = Spread
If the spread increases past a preset trigger value, then the trade should trigger.
Most arbitrage strategies require holding the amounts of both assets on both markets and simultaneously buying and selling of them. As it is a risk-free trade, it happens nearly instantly.
However, in the case of cryptocurrency, this would not be risk-free due to the high level of volatility. This risk can be minimized by “price risk.”
Price Risk means holding the trades indefinitely for arbitrage opportunities that could offset trading profits by a substantial margin.
This is how Crypto Arbitrage Bot Works by sending the assets from one market to another.
In this system, the spot price might be insufficient so that some additional statistical approach is required to increase the profit margin.
Instead of spot prices, there are some statistical approach to see if there are particular pairs that often have low liquidity. In which the Arbitrage opportunity may take.
The arbitrage opportunities within an exchange between assets with several pairs will minimize the risks with the trade, like transaction time and fees.
It requires a script to iterate through all the pairs on some exchange. Here is the example of the public Bittrex API. This script will not produce some graphs besides the iterate. It will transfer information quickly to show what is going on with the data.
Besides the Bittrex pairs, there is a way to find the biggest spread between Bittrex and Binance. This system works only between the Bittrex & Binance. (Github Code)
This two-place is good to start because of its consistency and volume.
The arbitrage trading bot works well in the crypto markets only. To develop an arbitrage strategy is quite complicated, and that required a lot of technical expertise. However, It is a unique idea to sell the cryptocurrencies at higher prices than the global average. The Crypto Trading Bot is an automatic trading system that has a risk of losing money, so everyone should be careful before investing in any system.
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