Experiment 1: Crypto Trading Bots
Updated: May 6
One of my commitments for 2021 is to do a series of financial "Experiments". The objective is to find out if certain investments, money saving tips, life hacks etc. are actually worth it. I'd like to have around 4 experiments in 2021 that will run for the whole year (as long as they're not a spectacular fail!). I'll do a review update of each one each quarter.
My theory is if I stagger their start over the next 3 months and have them all live before the end of March, the last one will have around 9 months to make some money...or not.
So the rules of the game are:
Relatively small investments - Experiments by their very nature are subject to failure so there's no point risking the house. It has to be money I'm willing to lose and right now, that feels like around R8,000 / $500 / £400 per experiment. It may vary but I'm going to put R50,000 / £3225 / £2500 aside for these projects in 2021.
It has to be replicable by anyone -I'm not allowed to use any contacts or specialist skills or knowledge or anything like that. The experiment needs to be the equivalent of an instruction manual that anyone can follow regardless of their financial situation. The only exception to that you would need to come up with the seed investment. Speculate to accumulate people!
It has to be scalable - There's no point doing something small that you couldn't do on a bigger scale. The whole idea is to find something that can make good returns but that's pointless if it only works with a small amount of investment.
It has to be sustainable - I could just go and throw all the money on red at the roulette table but what is the point of that? eventually I'd be broke. There's no such thing as a risk-free investment but it has to give the opportunity for sustained returns . I think the minimum 9 months testing period should address that.
It has to be better returns than the Bond Market. - Arguably bond market investment is as safe as houses (and very very boring) as an investment. In SA right now you can pick up a Money Market account or even a Bond Fund (which is a teeny bit more risky but largely a safe investment) that can deliver 7-8% returns consistently. So lets say each experiment has to deliver a double digit return over 12 months. 10% at least.
Ok, so that seems like a logical set of rules for the game. Other than that, I have free rein (is it rein or reign? I never can remember) and my view right now is the more controversial the better (as long as it's legal of course)
So let's get in the lab and cook up our first potion!
One of the most topical subjects in the South African personal finance arena right now is pyramid and ponzi schemes, they seem to keep popping up, people keep getting sucked in by the promise of massive returns and then inevitably when the ride stops and the company dissolves into the ether, the bottom lines of the pyramid get ripped off for a small, or even large fortune.
One of those companies going through that very melt down at the moment is Mirror Trading International (MTI). Thousands of South Africans bought or transferred their bitcoin savings to MTI who then used auto trading bots to generate profits for that pool of Bitcoin with promises of 10% monthly returns along with a sexy referral scheme to take 10% of your referrals profits also.
In my younger years I would have probably been on an investment like that like a rat up a drainpipe but it is for that very reason of meeting people who lost fortunes that I wouldn't touch something like that with a 3 metre barge pole. The first question you should ask yourself or even better the person that is trying to sell it to you is:
If the returns are that good, why do you need my money? Why wouldn't you keep it a secret and take out a bank loan to do it for yourself?
If you could achieve 10% returns per month and you invested R100,000 / $6500 / £5,000 (a sizeable investment but not a fortune in the grand scheme of things) and you reinvested your returns for 10 years, you would have R9 Billion / $600 Million / £460 Million. Now I don't know about you but I could probably get by on that kind of cash and I'd probably be willing to wait ten years for it. In fact, I wouldn't wait 10 years because after just 5 years you'd have R30 million / $ 2 million / £1.5m which would be more than enough for Mrs H and I to live a good life.
So whilst hindsight always has 20/20 vision, it was inevitable that MTI would eventually collapse.
However, what if you did just do it for yourself?
What if, you forget the 10% promise and you remove the illegal pyramid bit all together? I believe in no smoke without fire and whilst it looks like some of the MTI team had some previous on the pyramid side somebody in that group must have thought that you could make consistent returns using a trading bot in the crypto markets. And if they hadn't succumbed to greed, just maybe they could have made steady gains of more than 10% a year instead of punching for an impossible 10% per month? Just maybe?
Well let's find out in Experiment number 1: Crypto Trading Bots
So I've thought his through and it's not really complicated although it might look like it and it might be hard to get your head around if you know nothing about cryptocurrency (I didn't until about 3 months ago) but I'll try and make it as simple as possible.
We are going to create a robot (a piece of software, not a replica of R2D2 or C3PO) that will buy and sell crypto. It will buy when the price goes down a little bit and sell when the price goes up a little bit. It will do that 24 hours per day and 7 days per week.
But what if the price just goes down?
Good question, that is a risk. But to mitigate that risk, we're going to use what is called a "trading pair". this is a bit like trading currencies where you trade the US dollar to the UK Pound or the South African Rand to the US Dollar. The most common crypto trading pair is Bitcoin to the US dollar, but we're not going to use that. Why? because that could create the very problem we're trying to avoid. Bitcoin is all over the place at the moment and it has gone up around 400% over the last couple of months and is now on its way back down. That's too much volatility and unpredictability for us e.g. it's not sustainable, it's gambling.
To fix that issue, we're going to use a trading pair of two cryptocurrencies, in fact the most popular two; Bitcoin and Ethereum. These two are the OG's of crypto and are by far the biggest and are not likely to disappear anytime in the next year (which is a tick in the box for sustainability). What's more important is over the years they've stayed pretty constantly in line with each other from a price point of view, in general when one goes up, the other follows and vice versa. This is exactly what we're looking for as we will make our money on the time lag between one moving and the other following. Historically 1 Bitcoin is worth around 32 Ethereum's and whilst it fluctuates, it generally ends up back there. This makes it a perfect trading pair for us.
How do you create a crypto bot?
I'm glad you asked. The answer is you don't need to, there are a bunch of companies who will sell you one. But we don't want to pay for one either. After 10 minutes of Googling, I came across 3commas who have a free plan that lets you create 1 bot. I only need 1, bingo!
What kind of bot?
You're asking all the right questions. I did some research and to be honest, the only bot that made sense to my pea sized brain was a grid bot. I've seen these used before in currency trading. It's a pretty simple concept. You first look for the average price of your trading pair. We're going to use ETH/BTC (Ethereum to Bitcoin) which has an average price of 0.032 (1 Bitcoin = 32 Ethereum coins) so that will be our target price. The next job is to decide how much we think the price will fluctuate. I looked back over the last month and it has fluctuated between 0.029 and 0.035. So that will be our upper and lower limits.
Stick with me, it will all make sense in the end.
The final step is to how many "grids" we want. Grids are the increments between 0.029 and 0.035 where we buy and sell. the more grids you have, the more trades you make, however, if you have less grids, you make more money per trade. This will be refined over time but the cool software at 3commas actually tells you your return per grid when you play around with the numbers. I decided to use 20 grids as that gives a 1% return per grid, who knows if that is a good idea but thats why it's an experiment right?
So all we need to do is fund it with enough money to get going and we can press play (you do literally press pay to start a bot). This slightly more complicated. 3commas provides bots but it doesn't actually buy and sell crypto. It does however integrate with your provider through an API (don't worry if you don't know what an API is , it's just a connection from one website to another). It didn't integrate with my existing crypto provider but I was quickly and easily able to setup an account with Binance who are the biggest and most popular crypto provider. They were also offering transaction free crypto purchases by credit card so that made it nice and easy and cheap. I bought R6200 / $400 / £320 worth of Ethereum and we're close to getting going from a standing start within about an hour.
So what actually happens now?
You're full of questions today, and this is the important bit to understand. Once I start the bot it is going to place 20 buy or sell orders of around R310 / $20 / $15 each in a ladder configuration. if the EHT / BTC price right now is 0.33 it's going to place 10 BUY orders as a ladder between 0.29 (our lower limit) and 0,32 (our average price) and then another 10 SELL orders between 0.32 (our average price) and 0.35 (our upper limit). With me so far?
If in the next few hours the price increases to say 0.34, the bot will have made around 6 sell trades as the price increased. Each sell trade will make us 1% of the grid value. as the grid value is R310 / $20 / $15, each trade is going to make R3.1 / $0.20 / $0.15 which might seem like a tiny amount. You're right. However, because the bot is running 24 hours a day 7 days per week and the crypto markets never close, the trades will start mounting up and so will the money.
And what happens now?
Basically nothing. It needs checking daily to make sure the price stays in the range of 0.029 to 0.035 and if it goes out, you simply hit pause, adjust the bot to a new range and hit play again. the idea is to keep the range as tight as you can so the price stays within the range for a couple of weeks at a time. Every time you reset the bot there's small cost so you don't want to be doing it every day but at the same time you don't want such a broad range that you're losing out on the price volatility because that means your not making as much money as you could.
One other useful point is that every time your bot makes a trade the profit is saved outside the bot and not reinvested. I think this is a good thing but it does mean that each time you reset your bot, you need to change the investment if you want to reinvest. All the profit is paid in Bitcoin so if you want to keep it separate and get it out of crypto, you'd need to convert it back to Fiat (normal money) currency.
The final point to know is that one of the good (or potentially bad ) things about using two cryptocurrencies as your trading pair is that if the market goes up, you also gain from that. I am still not a full believer in crypto as an alternative currency so the way I see it is the price will go up and down and that will make the overall value of my investment go up and down too. However, I've decided that I've written off the R6200 / $400 / £320 original investment in my head already and I'll judge my performance by the profits from the Bot only and not simply the price of Bitcoin or Ethereum increasing. That way it doesn't matter to me what the price of the crypto's are, as long as the bot can keep producing profit like a little money making machine. So my major milestone will be cashing out my original investment within the year so that money making machine is running on pure profit and I have zero risk associated with it.
So how much money do you think it will make?
I have absolutely no idea, that why I'm doing the experiment doofus. However, I started this experiment on the 4th of January at 8:51 am and as I type this, it's the 14th of January at 8:50am so it's conveniently 1 minute away from 10 days. Now I should point out I've been playing around and tweaking settings a bit over that time so it's a bit early for predictions but I think I've found a bit of a sweet spot now and that's what I've described above (Which for reference, the important info is: ETH/BTC Grid Bot- 0.029 to 0.035 range with 20 grids) so let me lay out the progress so far.
Starting Investment: R6200 / $400 / £320
Current Value: R7,949 / $512 / £294
Gross profit (growth & bot): R1749 / $113 / £87
Gross % Return: 27%
Gross Annualised Return: 986%
Profit from crypto price: R1,333 / $86 / £66
Profit from Bot: R416 / $27 / £21
Bot % Return: 6.75%
Annualised Bot Return: 246%
Total number of Bot SELL trades (the ones that make profit): 290
Average Bot trades per day: 29
Average bot return per day: R42 / £2.70 / £2
So not a bad start to this experiment. I'm ignoring the growth from crypto price changes as that could disappear tomorrow but the bot profit is banked profit, I could convert it to Rand or Dollar or Pound today and spend it tomorrow. bearing in mind this is only a small investment for the purposes of this experiment, an annual return of 246% would be bloody amazing. Surely it can't keep going at that kind of profit?
Let's do a quick rule check for this experiment:
Small investments - Anyone could do this experiment with whatever they had. Binance charges 0.075% for every trade and there are no monthly subscriptions so there is no way that your investment could be too small to make a profit. However, there is a minimum grid value of 0.001 ETH so with 20 grids, at the current price, the smallest trade you could get way with is around R400 / $25 / $20. Clearly the returns would be fairly pointless until a couple of years passed but if you just wanted to replicate this experiment, I think that's the smallest you could do. Tick.
It has to be replicable by anyone -I used two websites that I never used before to do this experiment: Binance & 3Commas. I'm sure there are others but I think anyone in the world can register and I was able to get a bot up and running in a little over an hour. Tick in that box
It has to be scalable - This might need some time but I can't currently see why you couldn't just throw R1m / $65k / £50k at this if you had it. I need more time to understand risk. Being able to do it and it being a good idea are two very different things. No tick yet
It has to be sustainable - Well we won't know that for a few months at least, I'm struggling to see where this could fail unless Bitcoin and Ethereum cease to exist or become completely worthless. That is a real risk but it's fairly unlikely and you could sell out at any time. I'll reserve judgement on this.
It has to be better returns than the Bond Market. - Well as of today, the return is 246% per annum. I'm sure that's not going to stay like that but it's a promising start to end up higher than 10% over a year. I've actually already made 6.75% in the last 10 days so by next week, this could be a firm tick and I could walk away with 10% (I won't, but I could)
As a first experiment for 2021, I like this a lot. It's seriously controversial and goes against most of my belief in the right way to invest, slowly and cheaply over many years. But that's why I'm doing this, to start opening my mind to other possibilities. In truth it feels a bit grubby and like a get rich scheme that's about to go wrong but at the same time it's been a very interesting and educational experience. I literally check my phone hourly to see how many trades the bot has made and I constantly have a screen up with the ETH/BTC price graph in my home office, it's a little addictive.
However, I do think there's a way not to be greedy and setup a bot that will make a reasonable return over time and if that is the outcome of this experient, then it's been a good use of my time.
I hope this has been useful, this is one of many experiments I hope to do in the coming weeks. I would love to hear your views on this experiment and also any ideas you might have about future experiments or topics you'd like to see covered.
Until next time, keep living.