Types of Crypto Arbitrage Trading Bot

Arbitrage trading means taking tactical business advantage of the differential in the prices of an instrument in one market from those of an equivalent market. Arbitrage trading bots have been deemed a necessity for traders to be able to implement this strategy effectively. Now, let me further discuss the different categories of crypto arbitrage trading bots and how they vary from one another.

1. Flash Loan Arbitrage Bots

Arbitrage bots using flash loans exploit a particular aspect related to flash loans in decentralized finance (DeFi). These bots take levers of digital currency without any guarantee, engage in arbitrage activities within a single transaction, and repay the loan immediately. The whole process takes very few seconds to accomplish.

Example:

• Scenario: The bot notices a variance in the price of a token between two DEXs.
• Action: They borrow a flash loan, acquire the token at the lower price DEX, sell the token at the higher price DEX, and repay the flash loan while making a profit.

2. Triangular Arbitrage Bots

Triangular arbitrage bots exploit the distinction in prices of three distinct cryptocurrencies. These bots take advantage of the free market by opening three positions to make a profit from the price gap. This type of arbitrage involves trading pairs that connect back to the originating virtual currency, hence the term triangular.

Example:

• Scenario: The bot finds an arbitrage opportunity between the BTC/ETH, ETH/BTC, and BTC/USD or ETH/USD pairs.
• Action: The bot starts by using BTC to purchase ETH, then converts the purchased ETH to USD, and finally uses the USD to buy BTC to gain profits between the prices.

3. Spatial Arbitrage Bots

Spatial arbitrage bots utilize gaps in price and volume for the same tokens across various exchange platforms. These bots involve, for example, the purchase of a particular cryptocurrency at one exchange where it is cheaper, and selling at another exchange where it is expensive. Spatial arbitrage bots operate from multiple accounts and have to shift funds rapidly to capitalize on the brief price discrepancies.

Example:

• Scenario: The price determination is made, such that Bitcoin is offered at $30,000 on Exchange A while it is offered at $30,200 on Exchange B.
• Action: It directly purchases Bitcoin on Exchange A and directly sells Bitcoin on Exchange B, making a profit of $200 per Bitcoin.

4. Inter-Exchange Arbitrage Bots

Like the spatial arbitrage bot, inter-exchange arbitrage bots work with the primary purpose of capitalizing on the difference in prices of similar coins listed on different exchanges in the market. These bots put money forward and get deals done at the same time to avoid fluctuations in prices.

Example:

• Scenario: The price at Exchange A is $1,800 while that of Exchange B is $1,820.
• Action: The bot purchases Ethereum on Exchange A while simultaneously selling it on Exchange B to quickly capture the spread.

5. Intra-Exchange Arbitrage Bots

Price-crossing arbitrage bots take advantage of the price variation within the same exchange but in different trading pairs. These bots look for the arbitrage between two correlating pairs, for instance, BTC/ETH and ETH/USD in a single exchange.

Example:

• Scenario: The bot identifies that the price of BTC/ETH on Exchange A is not correctly priced for the ETH/USD pair.
• Action: It involves using BTC to purchase ETH, selling ETH for USD, and then using the obtained USD to purchase BTC within the same exchange platform and gain from the price disparities.

6. Decentralized Arbitrage Bots

Decentralized arbitrage bots operate in decentralized platforms known as decentralized exchanges or DEXs. Some of these bots exploit the price disparity between DEXs and other trading platforms or between various DEXs. They are essential in DeFi, where the price differences may occur more often, due to low volume compared to centralized exchanges.

Example:

• Scenario: A cryptocurrency is cheaper on a DEX than on a CEX.
• Action: The bot sells the cryptocurrency on the DEX and purchases it back on the centralized exchange to earn the price difference.

7. Sandwich Arbitrage Bots

Sandwich arbitrage bots primarily work on decentralized exchanges. These bots place an order in between two other orders to benefit from the price disparity created by the first trade hence the name, ‘sandwiching’. This strategy is employed to gain profits from the likely volatility in the price levels of stocks that are illiquid.

Example:

• Scenario: There is a large buy order placed on a DEX; now the price of a token is set to rise.
• Action: The bot buys a counter asset before the large order and then sells it, thus making a profit out of the difference due to the large order.

8. Crypto Arbitrage AI Bots

Crypto arbitrage automated trading robots employ the use of artificial intelligence and machine learning to analyze the market. These bots collect large amounts of information, study the market, and make the necessary changes to increase their profit.

Example:

• Scenario: Using historical and real-time data, the AI bot is programmed to learn and predict potential arbitrage.
• Action: According to it, the bot performs trades in several exchanges and trading pairs to take advantage of the price gap.

9. MEV Trading Bots

MEV trading bots take advantage of the fact that a transaction can be prioritized, delayed, or inserted into a block in a blockchain. These bots use the ordering of transactions to take advantage of the sequences to make a profit from the arbitrage.

Example:

• Scenario: The bot identifies an opportunity to make a profit from mispriced assets by rearranging the transactions within a block.
• Action: To be able to benefit before others do, the bot alters the order of the transactions needed for the arbitrage opportunity.

Conclusion

Crypto trading bots, particularly arbitrage trading bots, are critical for traders striving to make the most of price differences in various exchanges and trading pairs. So, the traders can decide on which type of arbitrage bot is best for their trading style and overall plan. The benefits of such bots principally depend on the reliability and efficiency of the platform where the trading ventures take place.