Bitcoin AI Grid Arbitrage: Strategy and Risks

David McNeal
Dec 4, 2019 · 5 min read
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There are many strategies for trading on cryptocurrency markets. Today we’ll talk about a combination of trading strategies in the following order:

  • Arbitrage
  • Grid
  • AI Trading bots

Arbitrage Trading

The decentralization of Bitcoin’s Volatile markets often results in varying prices reported on different exchanges. Since each exchange shows values bitcoin differently, unlike traditional trading markets, arbitrary opportunities are very common.

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Source: Bitcoinity Arbitrage Chart

Unlike traditional markets, arbitrary opportunities are very common in bitcoin markets. Exchanges report very different bitcoin prices for the following two reasons:

  1. Exchanges often operate on sluggish web technologies, where volatile price corrections can take a considerable amount of time.
  2. The decentralization of Bitcoin’s volatile markets often results in varying prices reported on different exchanges.

What is grid trading?

Pros and Cons

To better understand these trading strategies, we will talk about two typical market conditions. Let’s differentiate between two examples of good vs bad market conditions for implementing grid strategy in a bitcoin exchange.

Pro: Ranging Market

Con: Hype Market

How can an AI trading bot help?

The automated Grid Strategy

Programming an AI to place orders automatically enables a trading account to act quickly on arbitrary trading opportunities. By carefully setting high and low grid thresholds, the AI follows a pre-defined trading pattern and lowers risks by removing emotion from the equation.

Note: Correct configuration of stop-loss orders and automatic execution of exit strategies is critically important to profit from automated trading bots.

Automating configuration adjustments over time

For this to be possible, the trading account will need enough funds available to place bids when an exchange’s price is below the bid limit. When the price of the currency exceeds the maximum bid limit, the bot will cease to place bids until the price falls below the max bid limit.

The bot will begin and continue selling to an exchange as long as its price remains above the minimum sell limit. When an exchange’s price passes the limit, the bot will adjust the price and limit according to its pre-configured settings.

RISKS of Arbitrary and Automated Trading

Arbitrage trading can be extremely risky

You should be prepared to lose all staked funds. In particular, never risk funds set aside for activities like retirement savings, student loans, second mortgages, emergency funds, education, home purchase, or required living expenses.

Arbitrage trading requires knowledge of exchange markets

Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a stock suddenly drops, or if trading is halted due to recent news events or unusual trading activity.

The more volatile a stock is, the greater the likelihood that problems may be encountered in executing a transaction. In addition to normal market risks, you may experience losses due to system failures.

Arbitrage trading generates substantial commission costs

The total daily commissions that you pay on your trades will add to your losses or significantly reduce your earnings.

For instance, assuming that a trade costs $16 and an average of 29 transactions are conducted per day, an investor would need to generate an annual profit of $111,360 just to cover commission expenses.

Arbitrage trading may result in losses above your initial investment

A decline in the value of the securities that are purchased may require you to provide additional funds to the firm to avoid the forced sale of those securities or other securities in your account.

Short selling as part of your arbitrage trading strategy also may lead to extraordinary losses, because you may have to purchase a stock at a very high price in order to cover a short position.

Final Thoughts

Note: There is no 100% confirmation of the current market condition because it can be different from the individual perspective. For example, the charted condition on 5-minute intervals in a 1-hour period may look unpredictably different than those on 1-day intervals in a 30-day period.

The Startup

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David McNeal

Written by

The Cryptowriter — Cryptocurrency | Trading | Blockchain | FinTech | Compliance

The Startup

Medium's largest active publication, followed by +756K people. Follow to join our community.

David McNeal

Written by

The Cryptowriter — Cryptocurrency | Trading | Blockchain | FinTech | Compliance

The Startup

Medium's largest active publication, followed by +756K people. Follow to join our community.

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