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Against Every Logic – Trading Crypto Assets

The rapid rise of crypto assets has attracted numerous actors with dubious motivations. With supposedly revolutionary trading strategies, the big money can be made in no time, they promise. The following also applies in the crypto world; there is no free lunch. Beware of the pyramid schemes.

Crypto is a new and exciting world. But it also offers a platform for all kinds of fraudsters. Particularly during the great hype surrounding crypto currencies in 2017, fraudsters attempted to gain access to Bitcoin and Ether via an Initial Coin Offering (ICO). At the beginning of 2018, the ICO market collapsed and so the field of the crypto scammers also collapsed. However, they always find new ways to steal the money of unsuspecting victims.

By definition, arbitrage results in markets becoming more efficient and potential profit opportunities being arbitrated away.

When Facebook announced its own Libra crypto currency a few weeks ago, it wasn’t long before the first websites disguised as the official Libra website, advertised with discounted sales offers. Another popular scam is to attract people with offers that allegedly originate from an intelligent arbitrage trading strategy. There are free apps that advertise with so-called high-frequency arbitrage robots and other trading strategies. They promise returns of up to 20 percent. Per month.

A question of speed

This kind of fraud is well known and appears again and again in the form of different pyramid schemes. Since the profits are almost exclusively generated by the capital of newly acquired customers, new customers are always needed. But if you are promised double-digit arbitrage profits, the alarm bells should ring immediately.

Arbitrage is a real, completely legitimate business. It involves the risk-free exploitation of price or interest rate differences at different trading venues for the purpose of profit withdrawal. By definition, arbitrage means that the markets become more efficient and potential profit opportunities become smaller and smaller over time.

As a result of digital transformation and market transparency, retail margins have indeed become ever lower. This is also confirmed by Andy Flury, CEO and founder of AlgoTrader AG. His company specializes in algorithmic and quantitative trading for hedge funds and crypto trading companies: “Today’s arbitrage business is about speed. Only the fastest wins, even the second fastest goes away empty-handed. Arbitrage, even in the crypto area, is today only for professionals.”

According to trading expert Flury, the crypto-asset-market has become much more professional over the past two years and has therefore become more efficient overall. It is obvious that arbitrage in the crypto world must be highly efficient: Apart from frequently underestimated storage costs, crypto assets such as Bitcoin and Ether are digitally tradable around the clock, seven days a week, fungible, i.e. interchangeable within the same asset class. It is precisely these conditions that make them an efficient trading vehicle.

Infinitely high returns

Arbitrage profits are therefore only possible for the fastest. But even these gains would be arbitrated away over time by continuous arbitrage. It does not take a lot of expertise to see that free lunch cannot exist even in the crypto world.

Why do many market participants still fall for such offers that promise exactly that? Probably because of one of the oldest motivations of all, which is of course, greed. With a promised return of 20 percent, some people become weak. Flury, who himself worked for several years as a hedge fund manager, confirms this: “Private individuals always look only at returns, professionals do not. Rather, they look at the risk/return ratio.” According to Flury, the return can theoretically be increased at will. It is possible to generate 50 or even 100 percent returns per year – you simply have to raise relatively more capital. But this would also increase the risk of total loss. “Anyone who only has the return in mind forgets the associated risk,” says Flury. Asked about such arguments, members of such dubious projects reply that the new crypto world operates according to new rules and laws. It had been possible to develop a revolutionary arbitrage bot that had never existed before. It could do more than all its predecessors.

Be prepared for the future

At AlgoTrader there is only weary smile for such statements. “On behalf of our well over 50 clients, we have developed around 120 different trading strategies. So we have built pretty much everything you can imagine,” says CEO Flury. In many cases, many market participants would feel that they had a unique strategy. And it is exactly this trading strategy that other participants are already using. Often AlgoTrader also experiences that people come up with their own trading bot, which supposedly generates a huge return.

Anyone who thinks that the crypto world has already seen its biggest scams could be disabused.

On a closer look, however, the deception is exposed. Thus it happens again and again that the high returns results from a back-testing, which is based on particularly favorable time periods. A closer look reveals that the returns, applied to real day-to-day business, are significantly lower or even negative.

Ultimately, the arbitrage business always depends on one’s own liquidity. There may well be arbitrage opportunities on individual trading exchanges. However, as a trader you must always have the necessary liquidity to be able to compensate for any price corrections. Anyone who thinks that the crypto world has already seen its biggest scams could be corrected in the future. What if the Bitcoin exceeds its all-time high of December 2017 and drives the total capitalization of the crypto market to several trillion? The fraudsters are likely to be armed with even bigger guns. It is therefore even more important to begin educational work today.


Written by Pascal Hügli for Finanz und Wirtschaft.

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