In theory, AI arbitrage bots automatically recognize price discrepancies and offer unprecedented execution speeds that allow them to turn these discrepancies into profit. In practice, however, most AI arbitrage offerings fail to deliver any returns for their users due to transaction costs and, in some cases, outright scammy business models.
In this article, we are going to dive into the topic of artificial intelligence and automated trading systems and examine the scope of their effectiveness in taking advantage of arbitrage opportunities.
Key highlights:
- AI arbitrage involves machine learning algorithms for identifying arbitrage opportunities, while automated arbitrage covers any automated system, including user-created preset strategies.
- AI arbitrage bots, designed to exploit minute price discrepancies between platforms, often underperform due to high transaction costs and sometimes misleading business practices.
- Commercially available AI arbitrage bots generally offer minimal performance benefits and may not be significantly better than traditional algorithmic trading.
- Some legitimate platforms enhance algorithmic trading with AI features, improving user experience and strategy effectiveness in arbitrage trading.
Is AI arbitrage the same as automated arbitrage?
When talking about arbitrage in the context of cryptocurrency trading, automated arbitration and AI arbitrage are often used interchangeably. However, there’s a clear distinction between AI arbitrage and automated arbitrage.
AI arbitrage refers to arbitrage that’s conducted by bots trained with machine learning algorithms. Whether they use purely statistics or reinforcement learning, AI arbitrage bots identify arbitrage opportunities themselves and then carry out trading strategies that look to exploit these discrepancies on behalf of the user.
Automated arbitrage, on the other hand, is a broader term that refers to any type of arbitrage trading carried out by an automated system. This could include premade strategies, in which a bot executes trading orders when certain market conditions that a user outlines are met. Automated arbitrage could also include AI arbitrage bots, but the term is seldom used that way.
What’s crypto arbitrage?
Crypto arbitrage is a strategy used in cryptocurrency trading where a trader takes advantage of the price differences of the same asset on different exchanges (for example, the price of Bitcoin on Binance and Kraken). This difference in price is known as the “spread.” The basic idea is to buy a crypto asset at a lower price on one exchange and then sell it at a higher price on another exchange.
What’s the effectiveness of AI arbitrage bots?
Most commercially available AI arbitrage bots offer lackluster performance. The resources needed to create a system that offers sufficient execution speeds where AI arbitrage bots could exploit minute price discrepancies between different crypto exchanges are very high. In addition, most retail users don’t trade with sufficiently high amounts of funds to make AI arbitrage trading worth it.
On top of that, many platforms have emerged in recent years that supposedly offer AI features but have done so only to benefit from the hype surrounding all things artificial intelligence. The real extent of AI features is typically very limited and could better be described as ordinary algorithmic trading rather than true AI.
There are also many reports from users who’ve complained online that certain AI arbitrage bot platforms misrepresented the effectiveness of their bots, leading to potentially losing situations for users. We won’t name any names but we do recommend you conduct extensive research before using any of the AI bot platforms.
Does AI have its place in arbitrage trading?
It’s worth noting that not all AI-powered trading features are just a gimmick. There are several arbitrage scanners that combine old and proven algorithmic trading techniques and enhance them with AI features for a better customer experience. ArbitrageScanner, for example, recently unveiled an AI-powered analysis tool that lets users search for wallets based on different parameters.
Cryptohopper and 3Commas are two other prominent arbitrage bot platforms that have also recently launched AI features to complement their existing algorithmic trading experience. The combination of user-provided trading strategies and market trend insights collected by AI is currently the most powerful solution for the vast majority of arbitrage traders.
It’s worth mentioning that there are probably very capable in-house AI systems that are used by large trading firms that do provide an edge in trading. However, they are not commercially available, and for good reason. If someone had an AI bot that reliably makes money from arbitrage, why would they sell the bot to others and risk exposing their secrets to the broader trading community? It makes more sense to retain the knowledge and use the bot to have an upper hand in the market.
The bottom line
At this point in time, AI arbitrage bots seem more of a gimmick than a real tool that could benefit retail traders. The landscape will probably look completely different in a couple of years, but for now, algorithmic trading complemented with AI features aimed mostly at improving the user experience is the best choice. If you want to explore the best options available in the market, we recommend you check out our list of the best crypto arbitrage bots.
Source: https://coincodex.com/article/40378/ai-arbitrage/