For investors, algorithmic trading programs have proven to be advantageous in many circumstances. However, these „trading bots“ could prove to be particularly valuable for those interested in crypto currencies.
Trading bots reduce user errors while increasing the speed at which information is processed. They give traders more time and flexibility. In fact, however, they may find greater potential based on their nature.
These algorithms have been in use for decades. They originated in the time when the stock market was digitized. However, digital currency markets are less than a decade old and therefore have less experience compared to established markets, which has meant less time for the integration of trading algorithms.
Tim Enneking, CEO of Krypto-Invest EAM, emphasized the differences between high frequency trading (HFT) in traditional markets and those for crypto currencies.
He explained the Bitcoin revolution
„In high frequency trading for stocks, milli – and even micro – seconds count. And yet for the Bitcoin revolution these particularly small units of time are not nearly as important“. By using algorithms, investors can use a wide range of trading strategies for HFT. The use of the software includes very fast trades.
Another strategy that traders can use through trading bots is arbitrage trading – buying an asset in one market and then selling it in another at a higher price. The profit is calculated from the difference.
„If bot trading is included, it can generally prove profitable over time,“ Petar Zivkovski, Director of Operations for the leverage bit coin platform Whaleclub told CoinDesk.
In addition, there is more than one form of arbitrage, said Arthur Hayes, co-founder and CEO of another trading platform BitMEX, which has already discussed several approaches.
Traders can benefit from forward strategies, Hayes said. For example, you can benefit from the difference between a forward transaction and its underlying asset – this approach is called futures arbitrage.
Investors can draw profits from the difference between futures based on the same asset but traded on different markets.
Market Making of Bitcoin loophole
Another strategy that investors can acquire through trading Bitcoin loophole is market making. Hayes describes this practice as „constantly offering buy and sell prices for a range of Bitcoin loophole and digital currency derivatives“ to „capture the breadth between buy and sell“.
Zivskovski describes it as „placing limit orders close to the market price on both sides of the book“, meaning buy and sell orders respectively. If the price is structured over time and the trader’s algorithm program automatically and continuously places orders, he or she can benefit from the bandwidth.
He explained this with reservations, however, since the immense competition for these practices makes the strategy unprofitable, especially for „environments with little liquid funds“.
„You can’t get a foot on the ground there,“ said Zivkovski.