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Automatic trading on Bitcoin - does it make sense?
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Automatic trading on Bitcoin - does it make sense?

created Paweł MosionekDecember 28, 2017

Bitcoin breaks records of popularity. Every day, financial portals flood us with extremely shocking news that relates to the future valuation of this cryptocurrency. Proponents say that we are dealing with the last opportunity to buy at an attractive price, and opponents that the BTC rate is a ticking bomb that may explode at any moment.

We, as traders, should not worry about it and come up with a plan to make money from all the fuss. Extraction Bitcoin has long ceased to be profitable - so remains pure speculation. One of the ideas is automatic trading, which by definition should give us an advantage, greater possibilities in analyzing, concluding transactions and finding potential investment opportunities.

But is automatic trading on Bitcoin a good idea? Let us analyze this issue.


Read: Bitcoin Trading - is it actually profitable?


Trading with Forex brokers and automatic trading

Forex brokers they usually give their clients access to extensive trading platforms. This opens the door to relatively easy creation and use of automated strategies. It can be said that Expert Advisors (EAs) on MT4 are as popular as the indicator MACD. The more we should be pleased with the fact that an increasing number of brokers are introducing cryptocurrency trading to their offer. But there is a hitch.

bticoin automatic tradingThe dynamically changing and not entirely stable market quickly forced the brokers to review the proposed terms of trade. Some of the companies just during 2-3 months from the introduction of CFD into virtual currencies decided to lower the leverage, exclude from the weekend trade, and even freeze the option of entering new transactions. And the fees? The minimum ceiling was usually set at 7-10 $ but in practice we are currently observing the spread of the order 100-400 $, and rarely falls below the 3-digital values. In addition, there are horrendously high swap rates, both for long and short positions.

And suddenly we find ourselves in a stalemate. We have access to technology and the ability to create interesting tools, but transaction costs make it moderately profitable. There are two alternatives - switching to futures contracts, offered by e.g. CME, or going directly to cryptocurrency exchanges. The first option will be available to a few due to the required deposit collateral. So let's consider the second option. Only it has disadvantages, but more on that in a moment.


HOW TO BUY BITCOIN? [GUIDE]


Automatic trading for cryptocurrencies

Going through the world of automatons earlier ... Building a classic strategy requires checking it. The first phase, after programming the code, is a test on historical data - and here we encounter a new problem. The young market means limited access to archival quotes. We could insist and rely on data from the last 12 months. But that's a bother again, because the BTC chart leaves no illusions - one huge uptrend that is being pulled on a wave of crowd euphoria with no rational foundations. But will it always be like this? I do not think so.

So, could any classic form of strategy work here? I am very skeptical here. However, there is a kind of strategy that in its assumptions is based on irrational behavior and does not need historical data. It's arbitration.

Arbitration it consists in purchasing a financial instrument in a market where its price is relatively lower in order to simultaneously resell the same instrument in another market where its price is relatively higher.

Arbitration on the cryptocurrency markets

bitcoin arbitrageEvery fresh market shows its imperfections at first, which are gradually eliminated over time. Also cryptocurrencies, they can be very ineffective. The decentralization of trade and the lack of one valid method of valuing instruments creates a series of discrepancies in the valuation of the same instrument as Bitcoin is ultimately. Being a Forex trader, you have often noticed differences in rates between two different brokers. They usually last a few seconds maximum and are insignificant. In the case of BTC, the differences can reach several percent (!) And last much longer. This creates a lot of room for arbitrators to show off. Ready-made, commercial solutions for comparing exchange rates between exchanges are already available on the web. How effective? We will not advertise anything here :-).

High volatility and a young, dispersed market is an opportunity for significant differences to occur frequently. In addition, Bitcoin's quotation in relation to various currencies such as USD, EUR, CAD, and even PLN is another advantage that increases the margin of "error" in individual valuations. Creating the so-called triangles (triangular arbitrage) is a way to significantly reduce transaction risk and optimize results.

Triangular Arbitration is based on the simultaneous conclusion of three transactions on common links, eg BTC / USD, BTC / PLN, USD / PLN, whose volume is to be balanced and the exchange rate is additionally hedged with the currency.

The relatively low liquidity is another advantage for retailers. Thanks to this, we can be sure that the "small" (for now) will not be bent down to large players, who will be able to arbitrate more effectively and efficiently.

But before you jump in joy ...

The technological barrier is an obstacle. Cryptocurrency exchanges they offer a platform for concluding transactions that is much less functional. If you want to use this potential effectively, you need to spot differences in valuation efficiently. More or less? You can try - it will work out once in a while. But it will get harder and harder. And here arises the problem of how to "bite" into something with an automatic machine, where such a possibility is not foreseen at all? You can't do without a skilled programmer ...

Another problem is efficient capital management and optimal transfer (with the calculation of costs of various institutions) between exchanges. As long as our funds are paid to us. And here we come to the topic of risk ...

Crypto-arbitrage risk

Although well-designed arbitrage strategies are usually burdened with almost zero risk, there are additional risks in the case of virtual currencies. The lack of any regulations that would govern the stock exchanges is the biggest of them. We can say that we are dealing with a "free American" and we rely on the grace of the owner of the stock exchange on which we have decided to enter into transactions (which may also be manipulated by, for example).

Deposit guarantee? None of these things. Or maybe withdrawals of funds? Error. The customers of the Japanese stock exchange found out about it on their own Mt.Gox or Polish Bitcurex. Entering this market, we risk our entire capital. Unless we diversify or secure it properly. But that will only reduce the risk, not eliminate it.

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About the Author
Paweł Mosionek
An active trader on the Forex market since 2006. Editor of the Forex Nawigator portal and editor-in-chief and co-creator of the ForexClub.pl website. Speaker at the "Focus on Forex" conference at the Warsaw School of Economics, "NetVision" at the Gdańsk University of Technology and "Financial Intelligence" at the University of Gdańsk. Twice winner of "Junior Trader" - investment game for students organized by DM XTB. Addicted to travel, motorbikes and parachuting.