Bitcoin does not sleep, nor do its markets. Most exchanges run 24/7, day and night, even on weekends and holidays.
This is one reason some day traders — the people who trade on the price swings per hour or even per minute — use trading bots. These software programs can be plugged directly into exchanges, to apply trading strategies even when their operators are away from their computer, or busy doing something else.
Indeed, if there is such a thing as “money making machines,” trading bots are it.
Or are they?
Each of these trading bots react to market behavior on a specific exchange (or on several exchanges), and place buy and sell offers accordingly.
The offers they place are nothing out of the ordinary, and could be placed manually as well. However, by programming a sequence of orders, which is called “pre-ordering,” traders can apply a trading strategy without needing to monitor the markets continuously.
Stephan de Haas is Founder of Haas Online and creator of Haasbot. Speaking to Bitcoin Magazine, he outlined a basic example of a pre-ordering strategy:
“Let’s say I bought 10 bitcoins, and I want to sell them if the price reaches $1200. This can be done at exchanges already, of course. But using the bot, I can set it up to sell at $1200, buy back at $1000 and sell it all again at $1100. So I am building up a sequence of ordering events that must take place, and I define the exact target prices on it.”
De Haas is a solid believer that these trading bots can make money consistently. By utilizing Technical Analysis (TA) tools provided by the bot, users should be able to gain an edge on other traders, especially those that don't use trading bots.
Additionally, bots typically offer “insurance” options. Perhaps most importantly, these include “stop loss” orders that sell bitcoins if a predetermined low point is reached — for example, $950. This way, traders are sure they won’t lose more than, say, five percent of their holdings, if the market crashes while they are away.
Money Making Machines? Not Guaranteed
Some are more more skeptical about the value of trading bots, however.
Jacob Eliosoff runs a small digital currency investment firm whose strategies include algorithmic market making. Speaking to Bitcoin Magazine, Eliosoff agreed that bots can help traders — but noted that traders still make the decisions.
“It can be handy to have a bot that adjusts your orders based on market conditions,” said Eliosoff. “However, where a bot would guarantee a return on investment, the traditional question is: Why are the creators of these bots selling it to you rather than running it themselves? If the bot doesn't decide which trades to do, but just helps you execute your own strategy better — fair enough. Keep in mind there are no free lunches.”
Indeed, these kinds of trading bots serve as a tool, not as solutions themselves. And whether these tools are useful also depends on the individual trader: Some full-time traders are profitable without using any bots at all.
The person known as “Kazonomics,” who runs a trading group from his website kazonomics.com, is not a fan of bots. Asked by Bitcoin Magazine, he did agree bots can be helpful for some people — but also doesn’t believe any golden formula would guarantee an income.
“Having the right formula to do what you want, and be profitable in the market is not the same thing,” he noted. “And TA in itself will not guarantee you profits either. There is no TA that would have, one year ago, called the correct low of oil, for example.”
Aside from pre-ordering, bots can also be used to take advantage of market inefficiencies.
Two well-known strategies to benefit from market inefficiencies include arbitrage trading and market making. The former takes advantage of the price difference between different exchanges, for example to buy bitcoins for $1020 on Bitstamp and sell them for $1030 on Kraken. The latter places orders on otherwise low-volume exchanges, at slightly increased prices when compared to other exchanges, again to apply arbitrage.
Typically, trading strategies benefit from market inefficiencies. Perhaps this is where trading bots can be particularly useful, Eliosoff noted. “Bots can do well if they allow for more efficient — cheaper or faster — execution of large orders, or electronic market making,” he said.De Haas, too, thinks bots can take advantage of market inefficiencies.
“The flashcrash bot is one of our best bots,” he said. “A flashcrash is when prices on an exchange change very rapidly, and the bot exploits this by buying up cheap coins and selling when the price returns to normal levels. This bot can do between 5 and 15 percent a day, on average. Exchanges love this bot, too: It makes their order books more liquid.”
Kazonomics agreed that profiting from inefficiencies is probably the biggest advantage a trading bot can offer. “Models built around arbitrage and other mean reverting strategies, if done right, can work by exploiting market inefficiencies,” he said. Though, noting: “But I don't know anyone with a working model who will sell it.”
The problem with these strategies, Eliosoff said, is that they are, frankly, too easy to apply. If anyone can make money by simply turning on a machine that benefits from inefficiencies, many will; as a result, the inefficiencies will disappear over time. A trader profiting from inefficiencies will either need to keep finding new inefficiencies, or simply compete with everyone else.
This is also why Eliosoff’s trading fund primarily engages in algorithmic market making, a more complex strategy that smooths out large orders on a single exchange. “I specifically avoided cross-exchange arbitrage because I see it as too easy and thus too prone to competition,” he said.
So while Eliosoff believes profit can be made from inefficiencies, he concurred that it's not necessarily easy.
“Saying there are lots of ways to profit from arbitrage, market making and these types of strategies, is far from saying profits are guaranteed. Bots are like startups: obviously some succeed; also obviously, most don't. All in all, it's hard, and gets harder. The easier the strategy, the faster others are to jump in too,” Eliosoff said.
A surefire strategy that will make you money forever seems unlikely, therefore. And while some will argue otherwise, it’s virtually impossible to do so with a publicly available strategy. These will just be copied into oblivion.
“Value requires scarcity plus utility...so nothing of value is widely available,” Kazonomics explained. “That includes trading bots. Once these are disbursed widely into the market, they become unprofitable pretty quickly.”
And as day traders are playing the markets — or perhaps more accurately, playing each other — only the best and most dedicated will have a shot at making money long-term. Even if bots are a useful tool for some, “the most dangerous fallacy about bots is the idea that there's some off-the-shelf magic gizmo you can buy that will produce a little stream of free money,” Eliosoff said. “To make steady money, you need to build something yourself.”
De Haas, however, remains optimistic his bot can help traders: “100 percent sure.”