Navigating This Bear Market
It is no longer a matter of debate or speculation; as we enter our 6th consecutive red week, we can say without a shadow of a doubt that what we are witnessing is indeed a bear market. Both cryptocurrency and stock markets alike are down following the interest rate hike announced by the feds, and with no silver lining on the horizon, it’s hard to say when exactly the charts will turn green again.
Arbitrage traders however are likely having the time of their lives as they take advantage of all the price differences between dozens of markets. To understand why bear markets are ideal conditions for arbitrage trading, click here to read an article we published a while back on the matter.
Arbitrage Trading in Times of Volatility
In essence, the mass-selling that results from uncertainty creates a loop where an already-volatile marketplace becomes all the more volatile, sending traders into a panic. This increased volatility creates price inefficiencies between various centralized and decentralized exchanges. Since not all markets are seamlessly interconnected with each other, opportunities arise where a trader can buy certain tokens on one exchange, and sell them on another exchange where the price is higher.
That, however, is easier said than done. Manually performing these actions takes a lot of time and concentration, but that is the easiest part of the process. Human traders have to compete against trading algorithms to seize these opportunities first; and due to our limitations as carbon-based lifeforms, to say that we fall behind in such tasks would be an understatement.
One of the reasons we are building Sentient is to provide a user-friendly yet highly-advanced trading algorithm that can perform such tasks while investors go about their daily lives. It is a machine-learning, AI-assisted trading algorithm capable of learning and performing various kinds of trades and strategies, including arbitrage.
Our metrics from our private tests display how during periods of increased volatility, Sentient displayed increased cumulative returns. These tests were performed during relatively calmer days, meaning that under these circumstances, Sentient would be having the time of its life.
A Great Example of Arbitrage in This Market
Perhaps the best example we can observe is the case of Terra’s LUNA and the UST stablecoin. For the uninitiated, UST (TerraUSD) is an algorithmic stablecoin backed by LUNA, the native token on Terra’s blockchain network. LUNA tokens are burned and minted every time a UST token is redeemed or created, and it was thought that this pegging system would be sufficient for maintaining Terra’s DeFi ecosystem.
This was until the market began to crash, and people started selling their UST and LUNA tokens to exit their positions. For reasons not fully understood, this caused the prices of both tokens to spiral downwards — yes, including that of the stablecoin. Overnight, the price of LUNA crashed by over 90%, and as of writing, the UST stablecoin is trading at around $0.0005.
While the story is not relevant, it is important to establish the context for what is — the price differences of LUNA and UST across exchanges. UST for instance was trading from as low as $0.56, all the way up to $0.70. LUNA can be seen trading from around $1.75 up to $2.95. Between these highs and lows are dozens of different prices from a myriad of exchanges, waiting to be traded for the right price.
If you’re looking to dip your toes in arbitrage trading to gain some experience, now might be a good time to pursue such an interest. But, if you’d prefer for a powerful AI to perform these trades for you, then look no further than Sentient!
Between the time-consuming process of depositing and withdrawing funds, the stress of dealing with uncertainty and large funds, and the research and attention required to spot these trades; arbitrage trading can be a lengthy and tiring process most of the time. You can click here to read more about what Sentient is and how it can outperform any human trader at any time of the day.
Sentient is still under development, but if you’d like to be the first to try it out, make sure to follow Precog Finance for our latest news and announcements!