Market making is a huge part of contemporary financial markets. This process is used to facilitate trading and provide liquidity to target assets by increasing the trading volume. On the other hand,crypto arbitrage is a more direct way of taking advantage of market spreads and price differences within or across different trading platforms.
Let’s talk about these two approaches and how you can leverage the automation technology to benefit from both strategies. Should you choose one over the other or is it a good idea to use both methods alongside each other?
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What Is A Market Making Bot?
When an exchange wants to increase the flow of certain assets, it needs to introduce additional liquidity which is not always possible without interfering with the market directly. One of the best ways is using market-making bots which are special scripts that place orders on both sides (bid and ask) to generate trading volume. The spread between these orders is usually fixed to ensure that bots do not lose money.
While the incentive of an exchange for using these bots is apparent, many may wonder why individual and institutional traders use these bots.
Here are some benefits for investors:
- You may be interested in trading specific assets that do not have a lot of movement and liquidity. If you want to attract traders, it is a good idea to increase the trading volume artificially by simply placing multiple orders or engaging in high-frequency trading using automation. You won’t lose too much and attract more traders to the target asset.
- Some exchanges will reward traders who make markets and offer them special discounts and other privileges which can be quite valuable to people who focus their business on one particular exchange. If you regularly run a market making bot for crypto in such a platform, it may give you enough incentives to benefit on trading other assets for profit.
- Achieving early access to ICOs. Some DeFi platforms and startups in the cryptocurrency industry will gladly work with market-makers and provide them with additional benefits and AirDrop priorities to secure additional liquidity for their tokens. If you use HFT (high-frequency trading) methods, it will attract attention from startups.
There are some issues with using market-making as your main strategy. First of all, scaling is a big issue as you need a massive portfolio to make markets without causing damage to your financial situation. Secondly, it is not as flexible and prone to failing during periods of extreme market volatility.
What Is An Arbitrage Bot?
Arbitrage is one of the oldest approaches to trading assets and commodities. It means buying an asset for a lower price in one place while simultaneously selling it in another place. For example, ancient rice traders operating along the Silk Road could have outposts to monitor prices and instantly sell and buy rice to benefit on the price spread.
The same can be applied to the cryptocurrency industry, but some risks associated with the strategy are magnified by the interconnectedness of the market and instant communication. Price convergence happens very quickly which is the main problem for arbitrage traders.
Here are advantages of using a crypto arbitrage bot:
- You can trade across platforms or within a single spot market. The first approach is your standard arbitrage system when you monitor prices on two different exchanges (preferably separated geographically) to find price differences allowing you to arbitrage crypto. The second approach is called triangular arbitrage. It allows you to trade several related pairs of assets to benefit from spreads.
- Arbitrage is considered a very safe strategy, but it requires a large scale operation to be profitable since margins are usually low. The conservative risk style of this strategy makes it one of the most popular approaches utilized by retail traders, but it also means that the risk of price convergence is increased due to the massive trading volume generated by arbitrage traders.
- You can run several hundred bots simultaneously using the functionality of advanced automation providers such as WunderTrading. It is possible to run a complex strategy with bots monitoring thousands of different digital assets to identify the best opportunities to arbitrage cryptocurrencies instantly.
In general, arbitrage is a better approach to making money in the crypto market. When compared to market-making, it is a direct method of actually profiting on price differences instead of trying to achieve perks and privileges by simply providing liquidity to various trading platforms. As mentioned previously, there is a place for market-making operations on a large scale, but it can be risky and costly to run such an enterprise.
We strongly recommend carefully examining pros and cons of both approaches before committing to using one of them. Market-making and arbitrage require dedication and the ability to move large amounts of assets quickly. People with smaller portfolios will not be able to leverage the advantages of these strategies as well as people who have massive portfolios.
On the other hand, the size of a portfolio is a relative metric in the crypto industry. Having one hundred $BTC is not enough to cause a commotion in the Bitcoin market, but it is more than necessary to wreak havoc in lesser markets like RavenCoin or Shiba Inu.
Should You Use Either?
Market making bots can be extremely useful to people who have large enough portfolios to sway the market and create an influx of liquidity to activate certain target assets. However, the method will be mostly useless to retail traders without a large portfolio. Arbitrage is a good safe strategy that can be used by beginners, but you need to scale it up to generate meaningful profits in the long term.
Whether you want to run a large-scale market-making enterprise or consider starting small with a couple of reliable arbitrage bots, it is a good idea to choose platforms that can provide you with necessary resources and capabilities. Take a look at WunderTrading and its large arsenal of automation tools enabling users to build sophisticated automated trading systems for a relatively small price.