Jul 23, 2021
Who framed the Arbitrage Bot
While looking for the next project to invest on or while reading the announcement of a new IDO you might have read something regarding “bot prevention” and thought to yourself “well, that is really good! I don’t want any bots sabotaging my chances of making money” but, why is it that the first thing we think when we hear the word “bot” is that of something malicious or unfair? Do you even know what those bots do? And, are those bots really malicious at all?
There is a wide variety of bots, each one of them being able to perform extremely well unique and specific tasks but today we will be taking a look at how one of them works, the one in question being the Arbitrage Bot and giving you the information that you need to answer the questions above about this particular one.
What is a bot?
According to the Oxford dictionary a bot -short for “robot”- is “a computer program that runs automated tasks over the internet”¹ or in other words a program that simulates human activity without the need of specific instruction from said humans. This, as you can already imagine is extremely useful for operations that depend on precise and repetitive task given that it frees the user from losing time doing said tasks manually and offers superior precision on their completion
What is Arbitrage?
In traditional markets, for every asset listed there is a “set price” but given that usually the same asset could be listed in different markets at the same time there tends to be certain differences in price that, although minimal, open an opportunity for investors who want to make a quick and safe profit. That is arbitrage, or like the oxford dictionary puts it “the practice of buying something (for example, shares or foreign money) in one place and selling it in another place where the price is higher”².
So, what is an arbitrage bot and how does it work?
With the previous definitions now, we can say that an arbitrage bot is a program that looks for assets in different exchanges with slight differences in price and automatically uses that difference in price to make profit buying and selling simultaneously, which may sound like a cheat or like something that gives an unfair advantage to certain investor and that in the long run ruins the market but, that is not completely true.
Setting up a bot requires programming skills which not everyone has and, although there are companies that offer bots for a fee, if you want to be as profitable as possible in your operation this is still a loss. Even after getting the bot itself there are still risks present given that variables like projects with the same name, lack of volume, exchange wallets being offline or a change of chain can ruin the whole process, on the other hand, the bot cannot save you from things like high transaction fees or “pump and dump” schemes so it is not the perfect way of making money like a lot of people think it is.
Then, is it a good thing or a bad thing?
Although this system exploits a kind of vulnerability in the market it’s not inherently bad. Sure, for an inexperienced investor with no idea of what they are doing is going to be a bad idea thanks to the risks mentioned above but, for experienced investors with a bit of knowledge in how this process works it is a pretty safe and reliable way of making money, not only that, the practice of arbitraging is encouraged given that it is in no way illegal and it actually helps the market by adding liquidity and making it more efficient narrowing the prices of similar or identical assets with the selling of the high-priced ones and the buying of lower-priced ones.
In the end, whether or not to use arbitrage bots depends on the skills, the knowledge and the confidence that you as an investor have. For some it may be a scam, for others it may be the next big thing that will take them to the moon, the only thing that we know is that, like with anything else in the crypto ecosystem, you should DYOR and weight the pros and the cons before taking any drastic investing decisions.
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