crypto trading strategies

Arbitrage trading is a widespread concept in the stock market that entails capitalizing price imbalances between markets. Essentially, an investor buys an asset in one market at a lower price and proceeds to sell it in another market where the same asset is priced slightly higher.

For instance, say a particular international equity trades at $54 per share in one stock exchange. The same equity trades at $54.20 in another market. A smart investor will speedily bulk-buy the equities at the lower price and sell them at a higher price to realize a tidy profit.

This trading concept can also be replicated in the cryptocurrency market, especially by day-traders who actively monitor the market trends.

Cryptocurrency Arbitrage Trading

Arbitrage trading in the digital currency market is somewhat more efficient than the stock market. This is because there exist numerous marketplaces/crypto exchanges, unlike security trading, which is limited to one major exchange in a given geographical area. Moreover, the crypto market is relatively young, which means that most exchanges work independently and do not share information. This has led to price disparities and profitable arbitrage opportunities.

There are two major arbitrage trading strategies traders can use to make a profit.

Simple Arbitrage

Simple arbitrage is the most common strategy that is also used in forex trading and sports betting. In cryptocurrency, the strategy involves buying and selling the same digital asset on different exchanges and pocketing the price difference.

Now, assume that in one of the exchanges, Bitcoin is priced at $6,000 while trading at $8,500 on the other exchange. To efficiently take advantage of this price difference, you need to open a trading account in both exchanges. Then, you will buy Bitcoin at $6,000, transfer the coins to the other exchange and sell them for $8,500.

Unfortunately, this approach has two major flaws. First, you’ll have to incur transactional costs associated with transferring cryptos from one exchange to the other. Also, transfers between exchanges can take days. Given the volatility of digital currencies, your profits may diminish during this extended transfer period.

To morph up tangible profits, it is recommended to trade large volumes of crypto. This way, your returns are magnified to cover the transfer and delays.

Triangular arbitrage

Unlike simple arbitrage, triangular arbitrage is more complex as it involves leveraging the price differences among three different cryptocurrencies within one or multiple exchanges. The strategy can be termed as a cycle where you’ll be exchanging your initial crypto for a second and a third one before finally buying back your initial currency within a limited amount of time. So, the first trading action is required if you were to make any profits.

Here’s how it is done. There are three different assets on one exchange: BTC, ETH, and LTC. Deposit funds in your trading account and buy BTC as your initial crypto. Next, exchange your BTC for the low-priced LTC. Proceed to sell the LTC for ETH and finally trade the ETH back to BTC. Due to the price differences, your initial BTC holdings will have increased to reasonable amounts, which you can sell for fiat currency.

Even without owning BTC as your initial crypto, you can still make a profit by starting with a low priced crypto. In this case, you already hold some USDT in your account and want to buy 1 Bitcoin, which is currently trading at 6527.06 USDT. Instead of buying Bitcoin directly, you can trade your USDT for another currency, say ETH. Now assume that you end up buying ETH for 302.15 USDT for 1 ETH.

Your last step will be to exchange the ETH for at a rate of 1 ETH = 0.04643 BTC, which means that 1 BTC is trading at 21.5378 ETH. At the end of your trade, you’ll have bought 1 BTC for an equivalent of 6507.64USDT ( 21.5378 * 302.15). As such, you’ll have saved about 19.41 USDT, which wouldn’t be the case if you were to buy BTC directly with your USDT. If you cash out the final holdings immediately, you will make 0.3% profit, without considering the withdrawal fees.

What to Consider before using Arbitrage Trading strategy

In theory, cryptocurrency arbitrage sounds pretty straightforward to execute successfully. However, as with all trading strategies, arbitrage trading isn’t immune to risks. So, here are a couple of things to consider doing to mitigate some of the risks:

Make use of Trading bots.

Although manual arbitrage trading is possible, it’s advisable to make use of trading bots to execute trades. This way, you can be sure that you won’t miss any opportunity, especially considering that cryptocurrencies are highly volatile, and prices may move against you if you are not fast enough to execute orders.

Besides, arbitrage trading requires constant monitoring of market movements, which can be tedious. A trading bot, on the other hand, can be configured to run for long hours and execute trades when an opportunity arises.

Keep an Eye on the Fees

There are many costs associated with arbitrage trading that may eventually eat into your profits. Although some expenses such as transaction and withdrawal fees are unavoidable, it helps to review several exchanges and choose one whose costs are more affordable.

Also, be sure to factor in the taxes based on your jurisdiction. In countries where the law recognizes cryptocurrencies as assets, a trader will have to pay tax on every transaction. In this case, you should limit your transaction or rather use simple arbitrage instead of triangular arbitrage to minimize tax charges.

Limit Your Exposure

As mentioned earlier, arbitrage trading requires making large volumes of trades to realize reasonable profits, especially when the price difference between assets is narrowly spread. However, it’s prudent to only risk the amount you can afford to lose based on your risk tolerance.

Conclusion

When done correctly, arbitrage trading is an ideal trading strategy for earning quick profits by leveraging the constant price swings of the cryptocurrency market. But remember to take into account the risks involved and ways to mitigate them to increase your returns.

Cryptocurrency nowadays is a far cry from the time it was introduced to the world. With nearly 3,000 cryptocurrencies and more investors moving in to cash on this digital asset, cryptocurrencies are more popular than ever.

As a result, crypto traders are continually looking for ways that can help them execute trades quicker and more efficiently – especially considering the unpredictable nature of cryptocurrencies. Bots have been one of the answers to this, and while they may be handy for some traders, they also manipulate the market and can prove annoying for human traders.

In this article, we will be exploring what exactly bots are, how they manipulate the crypto market, and how you can respond to them as a trader.

What is A Bot?

A crypto trading bot is a software program that’s designed to analyze market trends and execute trades automatically. They are essentially robots that replicate what human traders would do in various market conditions.

One of the reasons bots have really caught on in crypto markets is the well-known volatility and unpredictability of cryptocurrencies. For instance, a trader could go to sleep with their holdings in a favorable trading position only to wake up and find they have plummeted significantly – all in a matter of hours.

Unlike humans who sleep, bots don’t. Crypto trading bots work around the clock to maintain full control of a trader’s holdings position. What’s more, a bot can process information and make trades much faster and more efficiently than any human ever could.

Bots have gradually become a strong presence in financial markets. They are especially popular with high-frequency traders because they can detect and take advantage of tiny pricing discrepancies.

As cryptocurrencies have become popular, so have cryptocurrency trading bots. Today there are many types of trading bots – some being free and open-source and others available for a subscription fee from specialized companies.

Types of Bots

There are various types of cryptocurrency trading bots. Arbitrage bots are one of the most popular. These bots analyze crypto prices across various exchanges and execute trades taking advantage of the price differences. Arbitrage bots also take advantage of how slow some exchanges might be in updating the price of specific cryptos, for example, Bitcoin.

Other types of bots test out potential trading strategies by utilizing historical market data. Still, others have been programmed to make trades in response to changes in prices or trading volume.

How Do Crypto Trading Bots Work?

Bots use application program interfaces (APIs) to process the relevant information in an efficient manner. Then, with the data that has been processed, these bots will generate both buy and sell orders for the trader based on how they have interpreted the data.

Such data will include information such as market volume, price movements, current orders, etc. Bots are customizable, and as such, a trader can configure them to analyze even more complex data. Crypto trading bots work in several ways – some through browser plugins, OS clients, trading servers, and others infused in cryptocurrency exchange software.

The Uncanny Relationship between Bots and Crypto Markets

The crypto market seems to be the perfect environment for bots to grow and expand their influence. Unlike traditional markets that close in the evening and on weekends, the crypto market is open for trading 24/7 – and nowhere could automated trading be optimal.

Also, the number of crypto exchanges has exploded in recent years, providing excellent opportunities for arbitrage trading. It can be difficult and extremely time-consuming, keeping up with all the exchanges to exploit these opportunities. As such, many traders employ bots.

Bots can make crypto markets more liquid and efficient – thanks to their rapid and voluminous execution. But this can also make the markets more volatile.

Bots are influencing a large percentage of crypto exchange trading volumes. Bots’ activity can manipulate the markets by inducing traders to buy at a higher price or sell lower than originally planned – which is very often the case with limit orders.

They can also influence market orders by presenting bot orders of negligible quantities close to the market price before the first real order of any significant volume is observed. These are the bots tricking you into placing market orders that will be filled instantly – but most of which will be filled against the order at a worse price.

Bots can also be an annoyance when you’re placing a bid, and it gets outmatched instantly – and especially if you’re placing an initial order based on what you thought to be a market ‘mispricing.’

How to Deal With Bots

So, how do you deal with bots? Some traders would try to outdo the bots by placing buy orders that are slightly higher than the bot’s bid price, or placing a sell order at a slightly lower price. Although this strategy may work for a one-off trade, it may not be sustainable in the long run –especially if you’re a high-frequency trader. Such little annoyances will eventually amount to considerable losses in the long term.

As such, it’s better to submit the bid price you had originally intended. If the market is volatile, then your order will still be filled, although it will take a bit longer.

Alternatively, you could take time and observe the behavior of the order book. Often, bot orders show up and then quickly disappear, or move around the book if there’s a constant adjustment of prices. By doing this, you could understand the intention of the bots and gain a more accurate perspective of how and when to place your order.

You could also get yourself a bot. While they can be frustrating for the average trader, bots can be a useful aid, especially for those who can’t afford to stay glued to the screen all the time. Also, they can process information and make trading decisions faster. After all, they don’t seem to be going anywhere, and they only become sophisticated with time.

Conclusion

Now that you know what bots are and how they can manipulate the market, you’ll be able to identify certain market movements that seemingly come from nowhere and respond to them accordingly. You can even buy yourself a bot and take advantage of their 24/7 trading ability, their efficiency, speed, and so on. Whatever you do, being aware of bots’ existence and their influence will help you make more informed and better trading decisions.