When it comes to buying and selling cryptocurrency, spot trading and arbitrage trading are often presented as two of the most sought-after options. But in the recent past, arbitrage trading has become less popular among new and seasoned traders alike.
This also reflects upon cryptocurrency trading bots, where you can find some arbitrage bots operating in the sector but with little to no success to their name. Even if you have not participated in arbitrage trading before, you might be curious to learn the reasons behind this phenomenon.
To help you understand why arbitrage bots in cryptocurrency trading don’t work anymore, here is a lowdown on arbitrage trading and its current state in the cryptocurrency sector.
🤷 Why Do Arbitrage Bots Don’t Work Anymore?
Arbitrage trading refers to buying assets at a lower price from a certain market or exchange and selling them for a slightly higher price at a different market or exchange.
The strategy provides you with minimal profits for each trade. But if you do your price checks quickly and perform your trades with just as much speed, you can get a decent chunk of daily profit depending upon your trading volume.
That is where arbitrage bots can help. When trading conventional securities, arbitrage bots can check their prices across different markets for you. From there, they can execute buying orders at an exchange that is offering the asset at the lowest cost. Afterward, they can execute selling orders at an exchange that offers the highest value for the cryptocurrency in question.
This principle also applies to cryptocurrency trading.
However, arbitrage trading in the cryptocurrency industry is riskier and more unpredictable than it is in conventional security markets. This also makes arbitrage trading bots ineffective in producing the same level of profit that their spot trading counterparts are capable of more often than not.
While there are multiple factors that work behind this effect, the following reasons influence the lackluster performance of arbitrage trading the most.
Volatility
One of the biggest reasons behind the underwhelming results of arbitrage trading is the volatility of cryptocurrencies. While stocks and other conventional securities have fluctuating prices that make arbitrage trading possible in the first place, the rapid price movements of cryptocurrencies take these changes to the next level.
This means that when you want to execute an order, there is little to no time for you to find the lowest prices for an asset at a popular market and the highest value for it at another market. Even when you are able to discover these fluctuations quickly, executing your orders before these figures change to something else can be a massive challenge.
For instance, by the time you can purchase the lowest offering for an asset at a certain exchange, some other exchange might be selling the same asset at an even lower price. This also holds true for selling assets at higher prices. Once you have located the highest price for an asset and move towards selling it at that respective market, some other exchange may already have a better offer in place.
Using arbitrage bots in crypto trading can simplify this process to a certain extent. Instead of manually having to search through different markets for the lowest and highest price, you can locate these prices almost instantly and move forward with completing your arbitrage trade. This saves you a significant amount of time and also gives you the comfort to automate your trades without being at your desk 24/7.
With that being said, the volatility of cryptocurrency gets in the way of providing you with a surefire win during your trades. Even when your arbitrage bot is able to locate the lowest and highest prices by fetching data from relevant markets, the amount of time it takes to make these trades can make those findings obsolete.
That is to say, the exchange selling a cryptocurrency for the lowest price may not be the best offer after a few seconds. Similarly, the market buying a cryptocurrency for the highest price would not be its most competent buyer when you are ready to cash it in.
As a result, the volatility and the confirmation time it takes for you to complete your transfer from one exchange to the other makes it next to impossible to make the most out of arbitrage trading.
The following volatility factors can either work by themselves or together to prevent you from obtaining your potential profits from arbitrage trading.
- It becomes difficult to find the actual lowest price for an asset in any given market.
- It becomes strenuous to discover which exchange is actually offering the highest price by the time you are selling your asset.
- It becomes grueling to close deals in a timely manner to maximize your profits.
This makes arbitrage trading for cryptocurrency an ineffectual way to increase your gains in digital asset trading. While you can still earn some profits, your trades almost never realize the full potential of this rapid-trading format. In turn, you are left with obtaining minute profits that are nothing to write home about.
For many fresh and experienced traders, this hurdle is enough to turn them away from using arbitrage bots. But even when you seem confident enough to try this form of trading anyway, you might want to rethink your options due to the next set of difficulties.
Transaction fees
Arbitrage trading in conventional securities not only works due to the relatively stable values of many assets but also remains effective due to low transaction fees. This makes it easy and affordable for security holders to quickly transfer their assets between different markets and make their trades right according to their plans.
In comparison, the high transaction fees that are associated with cryptocurrency transfers make arbitrage trading a comparatively costly measure to trade cryptocurrency. This can make you think twice before you execute trades with noticeable transaction fees attached to them, especially when they rival the profit that you are able to make from such a trade.
The transaction fee for cryptocurrency transfers depends upon a variety of factors. These include but are not limited to transaction confirmation time as well as blockchain traffic or activity levels. But in either case, the transaction fees can be high. On an average basis, it can range anywhere from 0 to 4 percent of your total transaction amount.
By now, cryptocurrency users are quite familiar with paying this level of transaction fees. This equally applies to fresh and experienced traders. But it does not save any type of cryptocurrency trader from giving up on the gains that they can get from arbitrage trading.
Since arbitrage trading provides minimal profits against each trade, giving a significant chunk of those profits to transaction fees negates the whole purpose of making that trade in the first place. This leaves you with minuscule profits that take the excitement and benefits out of arbitrage trading.
In some cases, the transaction fee itself can surpass the difference between your cryptocurrency buying price for a certain exchange and its selling value on another market. This means that arbitrage trading not only has the ability to diminish your profits but also carries the chance to inflict losses upon each trade. This makes arbitrage trading a high-risk and low-reward approach that pushes it further down the line of sought after cryptocurrency trading methods.
When you are using crypto arbitrage bots, the risk to realize these losses becomes even higher. It is because when you are not manually determining if the difference in available buying and selling value is less than your possible transaction fees, your cryptocurrency bot only looks at the difference between buying and selling prices instead.
While the bot makes a decision that is profitable on-paper, the exclusion of transaction fees from its calculations can hamper the outcome of the trade itself. This makes it easier for you to experience losses during what is a minimal profit-bearing method, to begin with. This can spell trouble for you at almost every arbitrage trade. When you make a number of trades in quick succession, this can be highly challenging for your financial health.
This is also a double-edged sword for traders. If you don’t use arbitrage trading bots, you lose on making quick analysis and automated trading. But in case you do end up utilizing the functionalities of these bots, you expose yourself to the risks of reduced profits and even possible losses.
Regardless of your overall investment portfolio and net worth, this makes arbitrage bots and the method of trading itself an undesirable practice for the cryptocurrency segment. Due to this reason, many traders choose not to take this route and instead stick with spot trading.
Trading volumes and pairs
The whole point of arbitrage trading is to buy and sell an identical asset on different markets. For conventional securities, this is a highly comfortable and even seamless transition between markets. But for cryptocurrencies, the process is not that convenient.
It’s because many conventional securities have identical pairs on their respective markets. But cryptocurrencies have different trading pairs associated with them that are not always available on all the exchanges. This means that if you find a cryptocurrency and USD pair selling for cheap at a specific exchange, you may not even find it at another exchange to benefit from the possible difference in costs.
At first glance, this seems like a problem that is only faced by obscure cryptocurrencies that are not available at a variety of exchanges. But when you dive deeper into exploring arbitrage trading, it doesn’t take long for you to find out that this issue is also faced by several popular cryptocurrencies. This makes the arbitrage trading process even trickier and precarious.
For instance, if you locate a BTC/USDT pair at an exchange for the lowest price among popular markets, you might want to seize the opportunity and buy the pair right away. However, when the time comes to sell it through bots, you may not have as many exchange options to sell the pair as it is. While the BTC/USDT pair is just an example, you can notice this phenomenon across a variety of well-known and new cryptocurrencies.
In manual arbitrage, this trading pair issue may cause you to settle at price differences with a short list of markets that don’t bear as much profit as possible with a larger range of exchanges. If you want to go a step further to sell off your newly-acquired cryptocurrency at a higher price, you may end up converting your digital asset or sell it off with a different currency pairing.
In both cases, the conversion fees and resulting difference in value would hamper your chances to benefit from arbitrage trading. In such scenarios, you may even incur some losses along the way. If you continue making arbitrage trades of this type, it can lead you to lose a significant amount of money in the long run.
This gets even more difficult when you are using arbitrage bots for your cryptocurrency trading. Since these bots use precise factors to execute their orders and the trades that result from them, a lack of the same trading pair at different exchanges keeps them from pairing the cryptocurrency you purchased with another asset. Depending upon the options that you choose, you may end up selling off your trading pair at marginal gains or with noticeable losses to boot.
When put together, this creates various hurdles in the process of obtaining noticeable profits from your arbitrage cryptocurrency trading. This results in many cryptocurrency traders to let go of arbitrage trading in its entirety. Instead, they end up using alternatives to this method such as spot trading, and pair that with their cryptocurrency trading bots.
↔️ What Alternatives to Arbitrage Bots Are There?
After going through the disadvantages of arbitrage bots in crypto trading, you may understand exactly why the method is not popular among cryptocurrency traders anymore. But that doesn’t spell the end for your trading activities. Instead, you can consider a few alternative strategies to make the most out of your cryptocurrency trading practices.
These include Grid and DCA strategies that allow you to quickly sell off your cryptocurrencies on the same exchange, but with a margin of profit. This resolves the loopholes of arbitrage trading, while also allowing you the ability to make quick gains from your trading activities.
When you turn to these spot trading bots, you can also reap the following benefits.
- Large selection of trading bot platforms.
- Extensive options of exchanges.
- No requirement to transfer your amount between different exchanges.
- Increased opportunities to obtain profit from trading activities.
- Decreased chances to incur avoidable losses from transaction fees.
When put together, these perks can provide you with massive benefits for your cryptocurrency trading. This allows you to gain maximum advantage from your digital asset trading activities.
With that being said, it’s important to remember that cryptocurrency trading is a risky approach and exposes your funds to losses. Keeping this in mind, only trade with money that you can afford to lose, and remain cautious in your approach as much as possible.