Arbtrust's pure arbitrage strategy is centered around exploiting price differences in Bitcoin across multiple markets.
Given that Bitcoin is traded continuously across the globe in various markets, opportunities for arbitrage are abundant. Our cutting-edge software, systems, and algorithms enable us to pinpoint the highest buying price and the lowest selling price for the same asset (Bitcoin) on any exchange. When our software identifies a profitable spread, we can instantly execute the buy and sell orders on the order book to take advantage of the opportunity. The transaction will only be executed if a profit can be realized, and it will happen simultaneously. It's worth noting that Arbtrust solely deals with Bitcoin spot trading and not futures. Bitcoin's high trading volume provides more opportunities for arbitrage across various markets.
It is crucial to understand and reiterate the fact that, with our pure arbitrage strategy, we do not hold onto assets. We facilitate negotiations by executing the buy and sell orders simultaneously. This means that the asset's actual price is irrelevant to our performance. Instead, we exploit market inefficiencies to profit from price discrepancies across different exchanges.
The transactions and the system are monitored and controlled daily as the software runs. Without constant updates and interventions, no set format can continuously monitor the system alone. The flow is governed by our IT engineers and technology developers, who watch the algorithm and the system performing live. Given the high-tech nature of our operations, there are constant updates and changes on the exchanges that we need to adapt to – for example, the most prestigious exchange in the world changes its API connections weekly. If we are not connected to the exchange, the algorithm cannot perform. Servers also change their location, and the integrations and connections must constantly be updated to have a whole team dedicated to our system's maintenance.
Fundamental analysis is an established approach used to determine the intrinsic value of an asset or business by analyzing various internal and external factors. The goal is to assess whether an asset or business is overvalued or undervalued, enabling traders to make informed decisions about entering or exiting positions. In contrast, technical analysis is focused on identifying patterns and using historical price data to predict future price movements.
While fundamental analysis is typically applied by examining business metrics such as earnings per share or price-to-book ratio, the digital assets industry presents unique challenges. Traditional technical indicators, such as RSI, MACD, and Bollinger Bands, can still be applied to the digital assets industry to predict market behavior, regardless of the asset being traded. This can help traders make more informed decisions and achieve better returns.
WHY FUNDAMENTAL ANALYSIS IS UNIQUE FOR OUR FUND’S STRATEGY.
It is important to recognize that digital assets cannot be evaluated in the same way as traditional businesses. This is especially true for decentralized offerings like Bitcoin, which are closer to commodities than traditional companies.
As a result, we need to look at different frameworks and metrics to assess their value properly.
The first step in this process is identifying strong metrics that apply to the unique characteristics of digital assets networks. This may include factors such as network activity, user adoption, transaction volumes, and developer activity. By analyzing these metrics and evaluating how they relate to the underlying value proposition of the exchange and the market’s overall performance, we gain a deeper understanding of its volume and trend.
Are key indicators that can be derived by analyzing data from a blockchain network. While it is possible to obtain this data by running a node on the desired network and exporting the relevant data, this process can be time-consuming and resource-intensive, especially if the goal is to inform investment decisions.
Instead, many investors opt to obtain on-chain metrics from websites or APIs that are specifically designed to provide this information. By leveraging these resources, investors can quickly and easily access key data points related to market movement, level of arbitrage opportunity, and exchange liquidity.
At Arbtrust, we use a variety of on-chain metric evaluations to assess these factors and inform our investment decisions. By carefully analyzing this data, we can identify potential opportunities and make informed trades that maximize returns and control the risks for our investors.
Although various indicators, such as trading volume and volatility, hold significance, liquidity remains the most critical factor in evaluating the market. Liquidity measures the ease of converting an asset into another without affecting its price.
Cash or cash equivalents are the most liquid assets, given their ability to be effortlessly converted into other assets. For this reason, Arbtrust utilizes USDT as a pair to BTC. Stablecoins like USDT and USDC have yet to become mainstream for everyday payments, but their widespread acceptance is inevitable. As of now, stablecoins are the facilitator for almost all the trading volume in the digital assets market, a market cap with approximately 1.2 trillion dollars, making them highly liquid and vital for the industry's functioning. In contrast, assets such as real estate, exotic cars, or rare items are considered illiquid since their purchase or sale can be quite challenging.
WHAT IS A STABLECOIN
A stablecoin is a digital asset that is designed to maintain a stable value relative to an external reference, such as the US dollar or other fiat currencies, commodities, or a basket of assets.
Unlike other highly volatile cryptocurrencies that can experience extreme price fluctuations in a short time, stablecoins provide a more stable and predictable value, making them more suitable for use in day-to-day transactions and as a store of value.
Stablecoins are backed by reserves of the underlying asset, such as fiat currency or commodities, or by a smart contract that adjusts the supply of the stablecoin in response to market demand. This helps maintain the coin's stable value, regardless of market conditions.
Arbtrust utilizes the USDT to perform arbitrage transactions using the price discrepancies of Bitcoin. The USDT is the US dollar's first and most widely adopted digital manifestation. It is a stablecoin that facilitates transactions and negotiations in the digital asset industry. It is designed to mitigate the impact of market volatility on cryptocurrency and digital asset valuations, such as Bitcoin.
USDT (USD Tether) is a type of stablecoin, a digital asset designed to maintain a stable value relative to a specific asset or basket of assets. In the case of USDT, the currency is pegged to the US dollar, meaning that each USDT token should be equivalent to one US dollar.
USDT is primarily used to exchange value on exchanges since it provides a stable store of value that can be easily traded for other digital assets. It is also used by traders as a way to hedge against volatility in the digital markets since USDT can be quickly and easily converted back into US dollars.
The USDT is pegged to the US dollar, meaning its value remains constant and unaffected by price fluctuations that often affect cryptocurrencies. The primary objective of the USD Tether is to provide a stable digital asset with a constant valuation, making it a reliable and stablecoin. Its value is tied to the price of the US dollar, ensuring it always maintains the same worth as its peg. By doing so, Tether provides steady and predictable liquidity to trade other digital assets and cryptocurrencies without facing unpredictable losses (or gains) due to volatile price changes. As of today, Tether's 24-hour trading volume ranges from $80 to $89 billion, and it has established itself as the most liquid digital coin in the market.
The most significant advantage of Tether is that it is tethered to a real-life commodity, the US dollar, providing users with greater trust and stability. This feature makes it a popular choice among investors and traders who value liquidity, security, and predictability in their digital asset investments.
Market efficiency is the degree to which a market facilitates the buying and selling of assets at prices that accurately reflect their intrinsic value. Intrinsic value, in this context, refers to the lowest ask price that a seller is willing to accept and the highest bid price that a buyer is willing to pay.
The difference between these two prices is known as the bid-ask spread. A market with low bid-ask spreads is considered more efficient, as it allows for more accurate pricing and fairer transactions.
A significant bid-ask spread often suggests that a market lacks liquidity, which is an indication that there are few buyers and sellers, and the market is not very active. Conversely, a small bid-ask spread implies that many buyers and sellers are available, and the market is liquid. In liquid markets, assets can typically be bought or sold without significantly impacting their prices.
The bid-ask spread is a useful tool for Arbtrust. As we aim to exploit small differences in the bid-ask spread over and over again to make a profit, our activity is beneficial for the market.
Since our constant activity reduces the bid-ask spread, all traders will also get better trade execution. As an arbitrage market maker, our activity helps the exchanges to maintain an equal price on market pairs. This is the reason why the exchanges need us to perform arbitrage at the level we perform.
WHY IS LIQUIDITY IMPORTANT?
What happens if you try to execute a large order in an illiquid market? Slippage. It's the difference between your intended price and where your trade is executed.
Slippage refers to the difference between the expected price of a trade and the price at which the trade is executed. It often occurs in fast-moving or illiquid markets, where the price of an asset can change rapidly between the time an order is placed and the time it is filled. To control Slippage, Arbtrust works with algorithms and real-time connections simultaneously; we execute the buy and the sell sides simultaneously – mitigating the slippage risk.
Our current efficiency rate is 99.3%, meaning we have a slippage rate of 0.7%. Whenever we are left with one end of the transaction open, we quickly execute the sale at the same price we bought for – ensuring that no losses will be taken and that we never end with the asset in our hands.
One of the methods deployed to assist with potential slippage, even though we perform simultaneous transactions, we can set up a slippage tolerance level to limit any slippage we do not want to experience. The fact that Arbtrust works with small orders it is also another slippage control strategy.
Market makers and bid-ask spread
The importance of liquidity cannot be overstated in financial markets. Trading on low- liquidity markets can result in significant delays before finding a suitable match for your order, sometimes taking several hours or even days. While creating liquidity is essential, it is not always possible for individual traders to provide enough liquidity on their own. In traditional markets, brokers and market makers are critical in providing liquidity in exchange for arbitrage profits.
As a market maker, Arbtrust takes advantage of a bid-ask spread simply by buying and selling the same asset simultaneously. Market makers can take the spread as arbitrage profit by selling at the higher ask price and buying at the lower bid price over and over. Even a small spread provides significant profits if traded in large quantities all day. High-demand assets have smaller spreads as market makers compete and narrow the spread.
For example, we simultaneously offer to purchase BTC for $350 per coin and sell BTC for $351, creating a $1 spread. Anyone who wants to trade instantly in the market must meet our positions. The spread is now pure arbitrage profit for the market maker who sells what they buy and buys what they sell.
Depth charts visually represent an asset's order book, displaying the quantity and price of bids (in green) and asks (in red). By observing the depth chart, traders can see the market's current state and the asset's liquidity. The difference between the highest bid price and the lowest ask price is known as the bid-ask spread, which can be calculated by subtracting the green bid price from the red ask price. The bid-ask spread is an important factor to consider when trading because it can impact the profitability of a trade. A wider bid-ask spread can result in higher trading costs, while a narrower spread indicates a more liquid market with tighter pricing.
To compare the bid-ask spread, we must evaluate it in percentage terms. The calculation is simple: (Ask Price - Bid Price)/Ask Price x 100 = Bid Ask Spread Percentage. This is one of the things our automated system does when looking for the highest bid-ask spread percentage across different exchanges. You can see it working clicking on link below:
Bitcoin's narrower spread allows us to draw some conclusions. An asset with a smaller bid-ask spread percentage will likely be much more liquid. If you want to execute large market orders, there is usually less risk of paying a price you didn't expect.
SPOT & FUTURES MARKET
Spot markets refer to the buying and selling of assets for immediate delivery, while futures markets involve contracts that specify the delivery of an asset at a future date, at a predetermined price. In the futures market, buyers and sellers agree to trade a certain amount of goods for a specific price in the future.
When the contract matures on the settlement date, the buyer and seller typically come to a cash settlement rather than physically delivering the underlying asset. Futures contracts allow traders and investors to hedge against price fluctuations and manage risk.
Centralized exchanges for spot trading manage regulatory compliance, security, custody, and other factors to make trading easier, which is the reason why Arbtrust works with centralized exchanges. As mentioned, Arbtrust does not work with futures – only with the spot market.
Futures contracts exponentially increase the risk as the investor can be hit with a margin call if the trade goes against him.