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Although simulations will predict good profits, you will probably lose your money doing this due to counterparty risk. Counterparty risk is the risk that, betwe
by tlb 9y ago
Although simulations will predict good profits, you will probably lose your money doing this due to counterparty risk. Counterparty risk is the risk that, between the time you click the 'sell' button and the time you actually get the money deposited in your bank account a few days later, the exchange goes insolvent.
When a given coin trades at different prices on two exchanges (which is what these arbitrage algorithms look for), it will try to buy that currency on the cheap one and sell on the expensive one.
The main reason coins have different prices (more than a few cents) on different exchanges is that people are worried about the exchange being insolvent.
For instance, during MtGox's slide into doom, Bitcoin was cheap there. So this algorithm would have been busily buying Bitcoin with USD on MtGox, then transferring the Bitcoin to another exchange to sell, so it could pump the USD back into MtGox. Since withdrawals from MtGox were throttled, you would have built up a large balance there. When they shut down, you would have lost bigly.
People do make money doing arbitrage between exchanges, but you need a sophisticated model that considers counterparty risk, which isn't something you can read from a price sheet.
- gormo2 9y agoNice comment. How does that relate to the SMA visualizations discussed in the article?
- wc- 9y agoThis comment is almost like a copy-paste every time some kind of crypto trading article is submitted. I might have missed something in the article / code but this isn't an arb strat? It is just using some moving averages to try to follow a perceived trend in different trading pairs on a single exchange. Counterparty risk definitely still exists, but it is getting better very quickly with the growth of regulated US-based exchanges like gdax, gemini, and ledger x. In the altcoin world, Bittrex is in the process of fulfilling state-by-state requirements for regulatory approval. The crypto world is very different today from when MtGox dominated and getting even better.
- nosuchthing 9y agoYou forgot the most infuential (and unscrupulous) crypto exchange in the cyptocoin ecosystem: Bitfinex. https://medium.com/@bitfinexed/latest https://medium.com/@bitfinexed/latest
- wc- 9y agoYes, very familiar with finex and the bitfinexed guy's warnings / rants / whatever you want to call them. If counterparty risk is a top concern (and it probably should be) then don't trade on unlicensed exchanges... That rule is great to follow and I haven't even gotten into any usdt tether issues...
- dharma1 9y agocouldn't you trade on decentralised exchanges where counterparty risk isn't a thing? at least if you're only trading between crypto pairs
- wc- 9y agoYes, decentralized exchanges (dex) are coming and I'm very hopeful. However, the ones I have looked at / tested so far just aren't ready for primetime. Slow transaction times, lackluster user experience, no liquidity. But those are all problems that are to be expected for what are basically beta-status projects (at best) and I am excited to see where things go from here.
- tlb 9y agoYou can still run an arbitration strategy even with one exchange, and the risk within that single exchange can be different between different coins. For example, if an exchange's Bitcoin balance is stolen but not their Litecoin, there might be a period during which you can withdraw in Litecoin but not Bitcoin. If the rumor mill works, that would be preceded by a change in the relative prices during which this algorithm would suggest buying Bitcoin.
- latj 9y agoIs there arbitration in cryptocurrencies? Arent transactions really slow though?
- csomar 9y agoI don't think you have read the article, traded digital assets or understand the current landscape of crypto.
- JumpCrisscross 9y agoAs a former high-frequency (HF) equity derivatives trader, I'm skeptical of HF cryptocurrency trading. There's a reason few modern markets have HF trading, an activity which could be described as vacuuming up nickels in front of bulldozers. HF needs a stable, predictable environment to make the nickels worth collecting. Risk management in HF is less about predicting what might go down than avoiding trading when liquidity dries up. This is why when markets get weird HF algos pull out: an unexpected one-minute trading stall can wipe out a quarter's profits. In crypto, where the market is still learning lessons from the 1930s, the nickels are quarters but the bulldozers are tanks.
- zodiac 9y agoI don't think this analysis is about cross-exchange arbitrage
- zxcmx 9y agoYou are correct re: exchange arb and gox, but it worked the other way around. Gox dollars were illiquid but BTC was liquid (until BTC withdrawals started failing just before collapse). So Gox had a higher BTC price than anywhere else. Problem was, if you thought you were selling BTC -> USD you were wrong, you were selling for GOX-USD which were known to be worth much less than USD. In fact, they turned out to be worthless.