Is arbitrage bot profitable in crypto trading ?

Crypto blog

Is arbitrage bot profitable in crypto trading ?

arbitrage bot profitability

The history of arbitrage bots in crypto can be traced back to early 2018 when traders began to use bots to take advantage of price discrepancies across different exchanges.

The high volatility of the crypto market made this profitable, as prices changes really fast in both ways, making all platforms hard to always be aligned in price.

These bots would automatically buy and sell cryptocurrencies on different exchanges in order to profit from the price differences. Initially, arbitrage bots were used mostly by large traders with access to sophisticated trading tools and capital.

However, as the crypto market has become more accessible and user-friendly, more and more retail investors are now using arbitrage bots to trade cryptocurrencies. There are a number of different types of arbitrage bots available on the market, each with its own unique features and advantages.

But what exactly is an arbitrage bot, and how does it work ? Could you use it to earn passive income in cryptocurrencies ?

On this article, i will try to explain this as simple as i can, in order to make it easy to understand if you are not familiar with this universe.

What is an arbitrage bot

An arbitrage bot is a software that enables traders to take advantage of differences in prices across different exchanges. For example, a trader may use an arbitrage bot to buy a cryptocurrency on one exchange where the price is lower and then sell it on another exchange where the price is higher, thus earning a profit.

Arbitrage bots have become increasingly popular in the crypto space as they offer a way to make money without having to put any money down.

What are the different arbitrage bots in crypto trading

There are a few different types of arbitrage bots, but the most common one are simple arbitrage bot and the triangular arbitrage bot.

Simple arbitrage bot in crypto trading

A simple arbitrage bot in crypto trading would be a bot that would look for differences in the prices of cryptocurrencies on different exchanges and then buy on the exchange where the price is lower and sell on the exchange where the price is higher.

This is done in real-time and require the bot to have access to the order books of the different exchanges.

Let’s take this example to make it easier to understand :

The bot detects on the same time :

  • Binance buying/selling Bitcoin at 16000$
  • Coinbase buying/selling Bitcoin at 16200$

In a fraction of a second, the bot will automatically buy it on Binance at 16 000 $, then selling it on Coinbase 200 $ more expensive.

As a result, you will be getting a 200 $ for this trade.

The principle is the same on a triangular bot, but it will include a third party, in order to access more possibilities.

The triangular arbitrage bot

The triangular bot is pretty much the same method, but adding one currency, in order to add more volatility and more opportunities.

A triangular arbitrage bot looks for three different cryptocurrency pairs that are trading at different prices on different exchanges.

In a triangular arbitrage, a trader simultaneously places three trades in different assets, taking advantage of the difference in prices to make a profit. For example, a trader might buy Bitcoin on one exchange, Ethereum on another, and Litecoin on a third, and then sell the Bitcoin for Ethereum, the Ethereum for Litecoin, and the Litecoin for Bitcoin. If the prices of the three assets are not perfectly aligned, the trader can end up making a profit.

This opportunity appears between three currencies that don’t have equivalent conversion rates at at certain point. This is obviously hard to detect from a human perspective, but a computer bot will be very efficient detecting it.

To make it simple, the bot will automatically detect the cheapest among the three crypto currencies, then will buy it, and therefore will try to sell it in on one of the two others remaining crypto, whatever could give you the best value at a specific point.

This strategy is very efficient if you choose 3 crypto you believe in the long run, because your bot wil try to increase the token quantity you have. Even tho the market is not really well, and you think you don’t earn money, because the $ value isn’t going up, your token bag is actually increasing.

Risks of an arbitrage bot in crypto trading

Arbitrage trading bots have become increasingly popular in the crypto space as a way to make easy profits. However, there are several risks associated with using these bots.

Let’s dive into everything you need to know about trading bots and their negatives aspects. This is an important part of mastering this subject, and making a difference between earning money or loosing money.

How is programmed my trading bot

First, if the bot is not configured correctly, it could end up losing money instead of making a profit.

Using your own trading bot

Because it is an algorithm trading, it could lead to some bad trades that could cost you money. If you are making your own trading bot, make sure you test it on virtual currency for a long period of time / trades. This trial period is crucial to make sure it will not make bad trades.

You must be very careful as a bot has no financial consciousness. If wrongly coded, it could end up loosing all your money in seconds.

Using copy trading to trade

What is copy trading ? As its name implies, it will copy another bot parameters, in order to execute the same orders at the same time. This option is much safer if you don’t know what you are doing. (Considering you don’t choose randomly your bot).

By doing so, you must take time to select the best bot to fit your needs. Here is a few criterias that can help you select the best arbitrage trading bot :

  • How many people are following it : Even tho this solo indicator is not a guarantee, it could give you insights of the viability of the bot.
  • How long is it trading for : The longer the better. If it has goods results for a long period of time, this is a good indicator of stability.
  • Is it profitable : The previous results could give you an insight of the stability. Warning : Even tho a said bot is making profits, there is not guarante that it is going to make the same profits. Previous results are not a garantee to future results !
  • What platform is it trading on : By the time this article is written, we are in the middle of FTX platform crash, a very turbulent time for the crypto market and exchange platforms. Make sure you double check the financial stability of the choosen platforms, even though we can never be sure. Binance seems to be the safest place to be these times.

The stability of the crypto trading platform

The exchanges on which the bot is trading could be hacked or experience other technical problems that could lead to losses. This risk is hard to anticipate as platforms tends to hide crucial informations that could lead us to secure our funds. This is what customers sadly discovered the hard way with FTX trading platform in November 2022.

As we write these lines, Binance seems to be the most stable platform. We would see more regulations in the future which could help us avoid these kind of fraud/crashs for our money.

The trading fees of the platform

When an arbitrage bot is trading, it is seeking really small differencies between currencies. The differences are often really small, less than 1%.

This means that is the trading fee is higher than this 1%, you will end up loosing money on every trade.

If you don’t take this into consideration, you will loose all your money. Make sure to select platforms with the lowest fees !

As we write these lines, Binance has made a special offer for traders. Here is a quote from their website :

To celebrate Binance’s fifth anniversary, Binance will introduce zero-fee trading for BTC spot trading pairs at 2022-07-08 14:00 (UTC). The zero-fee trading will cover the following 13 spot trading pairs: BTC/AUD, BTC/BIDR, BTC/BRL, BTC/BUSD, BTC/EUR, BTC/GBP, BTC/RUB, BTC/TRY, BTC/TUSD, BTC/UAH, BTC/USDC, BTC/USDP and BTC/USDT.

Validity Period: 2022-07-08 14:00 (UTC) until further notice

  • All users will enjoy zero maker and taker fees for all 13 BTC spot trading pairs.
  • The 13 BTC spot trading pairs will be excluded from BNB fee discounts, fee rebates or any other form of fee adjustments or fee promotions.
Binance website

to summarize this :

  • You don’t pay fees on your trades, between these currencies :
    • Bitcoin / Australian Dollar (AUD)
    • Bitcoin / Rupiah Backed Stablecoin (BIDR)
    • Bitcoin / Bitcoin Brasil Real (BRL)
    • Bitcoin / Binance USD (BUSD)
    • Bitcoin / Euro (EUR)
    • Bitcoin / Pound Sterling (GBP)
    • Bitcoin / Ruble (RUB)
    • Bitcoin / TrueUSD (TUSD)
    • Bitcoin / USDC
    • Bitcoin / USDT
    • Bitcoin / USDP
    • Bitcoin / Bitcoin Ukrainian Hryvnia (UAH)

The trading volume of the selected coins

In arbitrage trading, you want your bot to execute trades as fast as it can when an opportunity is here. However, if you select a coin that has a really low trading volume, you could be stuck with this coin and could not sell at desired price.

If the trading volume is too low, the liquididity of this coin is a problem. To put it simply, you might buy a coin because there seems to be an arbitrage opportunity, but there is no one to buy back from you at a specific timing.

As a result, you would have to lower the price or wait longer to sell it, so most likely loose money on this trade.

To avoid this kind of situation, just avoid really low daily market trade on your selected coins. Stay in top 50 on coinmarketcap, and this is less likely to happen.

Now that you understand how an arbitrage trading bot works, you must be wondering what bot you should pick. Fortunately, we have made a selection for you, with 6 of the most efficient bots available today.

Acting quickly to take advantage of arbitrage opportunities

One of the key factors that can affect the profitability of arbitrage bots in the cryptocurrency market is the speed at which they can act. In the fast-paced world of cryptocurrency trading, arbitrage opportunities can come and go very quickly, and it is important for arbitrage bots to be able to act quickly in order to take advantage of these opportunities.

If an arbitrage bot is slow to react, the price difference between the two exchanges may disappear before the bot is able to complete the trade, resulting in missed opportunities and reduced profitability. On the other hand, if an arbitrage bot is able to act quickly, it may be able to take advantage of more arbitrage opportunities, potentially leading to higher profits.

Therefore, the importance of acting quickly cannot be overstated when it comes to using arbitrage bots in the cryptocurrency market.

Price of the trading bot membership

Most of the trading bots offer limited functionnalities if you are on a free membership. To access more advanced functionnalities you need to pay each month. The price is different according to your trading platform, but most of them starts at 25/30$.

Depending on your budget, this can be a limiting factor because it implies that you earn at least 30$ a month with your trades just to pay back this membership.

I would personnally say that it is worth for larger investors because of this flat price. Small portfolio will struggle to earn money with those bots.

Let’s say you have 100$ to invest each month, you need to reach a 30% gain just to pay back your membership. Earning 30% a month is already a big gain not so easy to reach.

For someone who invests 1000$ a month, this represents only 3%, which would be much easier.

Conclusion : is an arbitrage bot profitable in crypto trading in 2023 ?

As a conclusion, i would say that it is really hard to earn money using arbitrage bots, because of te size of our wallets. Let’s sum up my point of view in different points :

Lots of trading fees

There are too many fees that will force us to takes more risks in order to earn actual money. You pay fees on each trades (except a few trading pairs). You pay a membership on your trading bot. As i said before, small investors would need huge return on investments just to pay back monthly fees. This means more risks, more possibilities to loose money.

The only solution to actually earn money would be to have/learn the knowledge to code your own bot, excluding some fees.

Big traders are already doing this

Arbitrage trades are a common practice for many years now. This means that larger investors already take the big part of the cake. This smooth out prices opportunities between coins/platforms. The leftovers are so small now that it’s not worth it for small investors.

This requires time and effort to make it work

If you are a small investor with limited knowledge, and limited time to invest in it, this is a risky choice. Only a very small percentage of the investors are earning money from it, and they have the money/knowledge/network to make it work.

Youtubers & Bloggers could be a negative influence

It’s a quick gain scheme. You will most of the time see posts and videos pretending that you can easily access big gains by following their advices. First of all, they probably earn money with affiliate links on the products they talk about. Moreover, they earn money when people watch their videos. It’s in their interest to pretend there is big gains. There are a lot of clickbaits videos.

I’m not saying all influencers are bad, but some of them don’t really care about you. If they had a clever idea to earn easy money that actually work, why would they share it ? It’s just more competition to them.

Take your time, learn, make informed decisions

Be careful to what you read/watch, and always take your time when taking big decisions. If you are new into crypto investment, take your time to train yourself and learn as much as you can from various sources. Crypto trading is probably even harder than regular trading, and more than 90% of the traders actually loose money.

This is not the best way to earn money.

This is by far more interesting for small investors to invest on the long run, using time to your advantage. Train yourself, learn everything you can learn about crypto markets, and invest in bear markets. You will be rewarded if you are patient enough.

Read more about cryptocurrencies & blockchain :

What is the most secure crypto wallet ?

What is DCA in crypto investment ?

“FOMO” effect and how to deal with it