Cryptocurrency Bot Experiment Update & Tutorial
This post has been requested by a few Tribal Fi readers who have asked for more information on how I got into Crypto Trading Bots and if they actually make you any money.
Well here goes, this is going to be long and a bit of a head bender but hopefully it will be worth it.
How did I discover Crypto Bot Trading?
Regular readers will know that in January 2021, I launched a number of financial "Experiments" to see if any of the investment trends or fads could beat the proven track record of Low Cost index Trackers, which are the weapon of choice for most FIRE early retirees and give a very nice annual return of around 10-12% with a relatively low risk over the long term.
They work great, and I'm heavily invested but they are somewhat, well, boring when it comes to an investment. You just pump cash in, wait and it grows. Nothing wrong with that and as a way to sleep well at night whilst living off your savings, they're a no-brainer but I've always liked a little more excitement in my life so I invest a small amount of our savings in the slightly wilder side of personal finance and one of the most wild rides in town is cryptocurrency.
None of this post is meant to be construed as financial advice as putting it frankly, cryptocurrency is more akin to a visit to the casino than to the bank so this post is purely educational and hopefully for anyone who has already decided to take a walk on the wild side, will save them some of the school fees I paid to learn this sorcery.
So, I had messed around a bit with Forex trading in my younger years to spectacularly disastrous consequences and had basically parted with a small but significant amount of cash. I didn't know what I was doing, didn't attempt to learn and got suckered in by all those tempting apps and adverts in the noughties that claimed everyone was getting stinking rich except me. They weren't, the only people that were getting rich were the companies who owned the apps.
So when I discovered crypto trading bots I was older and wiser and wasn't going to be anyone's fool. I gave it a go in the name of science and was prepared to lose the R30,000 / $2,000 / £1,500 seed money I invested, but who knows, I might just make a little something for rainy day.
Well the good news is that it did, and I am starting to make a little something. I have spent a lot of hours (I would estimate probably 1000 by now) learning the intricacies of how the bots work, what works, what doesn't and most importantly I've learned the difference between those evil forex trading apps and the new world of crypto.
And that subtle but critical difference is the crypto world makes it's money off people's success, not it's failures and that is massive. As an example, a casino makes money from you losing, that's how it works, but in Crypto trading, you generally pay fees on your trades (like buying stocks and shares) so if you lose your money, you stop trading and the Crypto exchanges and trading platforms stop making money from you. This simply means they give you masses of resources and education so you don't screw it up, it sounds a bit weird but it's like everyone is on the same team.
So in order to get on with the "How" and less on the "Why" a few stats on how I'm positioned today, 8 months into this experiment.
As of this morning, I have a total of 37 bots running with a combined value of R330,000 / $22,000 / £16,500 and my total investment has been R290,000 / $19,000 / £14,500. A profit YTD of R40,000 / $2,650 / £2,000 or as a percentage a return of 13.7% YTD and an annualised return of 20.6%.
Not too shabby but you may be thinking that doesn't sound so good for something so risky, especially when the S&P 500 (My favourite index) has returned 20.8% YTD and 31.8% over the last year.
And you'd be right. However, the Bitcoin price (which is a proxy for the crypto market index) over the last 8 months has doubled and halved again from $30,000 to $63,000 to $30,000 and is now on the climb again to $46,000 so I'm currently recovering from the recent halving of crypto value in May so to still be 20% up when the market has dropped by 25% is a bit of a result in my book.
So what is a Crypto Trading Bot?
It's basically a piece of software that monitors two currencies and then sells when the price goes up and buys when the price goes down and you make the profit between the two trades. For example; I buy $100 of Bitcoin when 1 Bitcoin is worth $30,000. Then I sell that bitcoin when the price is $40,000 and I get back $125. I bank the $25 and wait for the Bitcoin price to drop back to $30,000 and I buy $100 again. This time it drops to $20,000 so I buy another $100. I now have an investment of $200 at an average Bitcoin price of $25,000. Now the bitcoin price jumps back up to $40,000 and I sell my stake and get back $320. I bank £220 and have the other $100 ready to buy Bitcoin when it drops back to $30,000. The bot repeats this process over and over again banking the profits and working to an average value of $100 at a bitcoin price of $30,000.
In the example above, I made a total profit of $145 on a total investment of $200 in just three trades. Now before you get too excited, it could take a year for Bitcoin to fluctuate at those levels so it's not as simple as opening the wallet and waiting for the cash to roll in.
In the example above the "Grid Width", which is the distance between your buys and sells was $10,000 and in our example that was 33% (we started at a price of $30,000 and set buys and sells $10,000 apart) which could take weeks, months or even years to achieve. Instead I have found my sweet spot at around 3.5%. What this means is that if I bought Bitcoin at $30,000 my first sell would be at $31,050 and my first buy would be at $28,950. This could potentially trigger an event as much as once per day.
If I use the same $100 per grid then everytime there is a buy and then a sell, I make around $3.50. That may not sound much but even if I conservatively say I make 3 trades per week, that's a 10% return per week!
But you can't really have just one grid e.g. buy at $30,000, sell at $31,050 as it is unlikely that bitcoin would stay in that range. So the solution is to buy 10 grids at 3.5% so you create a range for the Bitcoin price to move around in. This means that you buy 10 grids at $100 each meaning you now need to tie up $1000 so every trade that gives you $3.50 now only represents a return of 0.35% but it does mean you now don't have to do anything as long as the Bitcoin price stays between $25,950 & $34,050 which it may stay in that range for several weeks. This allows your bot to do all the hard work and buy when the price is at the lower end and then sell at the higher end. This happens 24 hours per day, 7 days per week and 365 days per year, the cryptomarkets never close so you are literally making money in your sleep.
So why not just set the bot to trade 100 grids between $1000 and $100,000?
You could definitely do that and it would then in theory be a truly passive income but you would need to tie up 100 x $100 = $10,000 and each buy and sell trade would make you as little as $1 (if the price went down close to $1000) and at most $50 (if the price hit $100,000) which if you take the average of $25 a trade and the same 3 trades per week, you would only be seeing a return of 0.25% per week or 13% per year.
Most importantly, and this is the critical point of Crypto Trading Bots is that whilst the example above theoretically covers all bases and pays a fairly decent return of 13% annually, who knows what could happen to the Bitcoin price. Today it is $46,000 and tomorrow it could be $20,000. If you then needed to pull out your investment of $10,000 for some reason, you would only get $4,347 back.
And this is my biggest learning from this experiment, you have to follow a couple of rules if you want to make money this way:
You have to be able to invest your starting stake permanently e.g. put $1,000 and assume you're never going to cash out. The only time cashing out is possible is when the price is higher than when you started. This sounds obvious but remember Crypto can go up and down 60,70 or 80% in a day easily. You cannot rely on being able to get that money out.
You have to believe that the coin your trading is going to go up in value over the long term.
You have to believe that Cryptocurrency is here to stay and that it's not suddenly going to collapse completely one day and take all of your investment with it.
If you can get your head around those three rules, then I firmly believe that money can be made using bots to trade crypto and I'm going to share a live example.
An example of a working bot
So to show you a real example of a trading bot I'm going to share with you one of the bots that has been running the longest and is also one of the most popular coins. The trading pair (the name for the two currencies you're trading with) is USD/ETH. This is the second biggest crypto coin Ethereum and a Stablecoin linked to the US Dollar. Stablecoins are simply cryptocurrencies that mimic a normal Fiat currency. They are useful because it means your investment stays as cryptocurrency but you can understand the value (it used to be a way of avoiding paying tax on every trade but that loophole is closed in South Africa)
So here she is in all of her glory:
She might not be much to look at but she's just 102 days old and will pay for herself in full in the next couple of weeks.
To explain the picture above and help you bring to life my descriptions from earlier, I'll start on the left and work my way to the right.
This bot was created on the 5th July and I made a total investment of $1000
It tracks the price of Ethereum against the US Dollar
It has 10 grids at a width of 3% (The average of 2.64% & 3.35%)
It is currently trading between a price of $2810 to $3688 and trades roughly when the Ethereum price changes by $100 in either direction
This means it pays around $3.30 per trade
In 102 days it has filled 177 SELL Orders (The ones that make you money)
This bot makes an average of $9.28 per day or 0.93% per day
This bot is providing an annual return of 338% and a profit of $2,388 (plus the return of my initial $1000)
It has made $947 in the last 102 days so will soon have paid for itself and will continue to provide an income risk-free
Ethereum is the 2nd biggest cryptocurrency and has been around for 6 years and has grown from $12 per coin in 2015 to $3,243 in 2021
This is not my most profitable bot by far but is probably my lowest risk bot due to the sheer size of the Ethereum crypto coin. Ethereum's market capitalisation (the total value if all coins were sold today) is currently $380 billion. As a comparison, Disney, a company that has been around for 97 years, has a market cap of just $322 Billion.
So How Did I Start Trading?
To own a crypto trading bot you need just two things:
A Crypto Exchange Account - Think of this as the same as your share dealing account. It's a place to buy and sell Cryptocurrency in the same way you buy and sell shares. You pay money into your wallet on the exchange and then use the funds to trade. I have two exchange accounts (So I can separate my personal crypto investments and my business crypto investments). My first account is with Binance. Binance is the biggest and most famous crypto exchange and is great for starting out. Their fees are 0.1% per trade. I also use the FTX exchange which I personally favour as the fees are lower and if you hold (called Staking) 25 of their own Cryptocurrency: FTT - the FTX Token, you can actually get most of your trades for free and the ones that are not free are just 0.065% per trade. The fees may sound tiny, and they are compared to traditional stockbroking fees, but with 37 bots running I've made over 10,000 trades in the last 8 months at an average of £100 per trade so you can do your own math but a few hundredths of a percent in fees can make a big difference.
A Bot Trading Platform - This is basically where you create your bot. You setup your account, connect it to your exchange and then create a bot and turn it on. It seems pretty complex at first but once you get your head around what it's doing, it's super simple. I use 3Commas as a platform which I've found to be a little bit clunky at times but overall it's absolutely brilliant. My biggest learning (That took me 6 months to figure out) is that with so many bots running I have to refresh the browser every time I want to edit one of my bots because I'm constantly trading so the bot and the exchange get out of sync. In terms of fees, 3Commas works on a subscription and you can have a free account where you are allowed to run 1 grid bot (everything I talk about in this post is about Grid bots, there are other types which I stay away from) completely for free which is what I did for my first couple of months before I took out a paid subscription. There are 4 tiers of membership ranging from Free to Pro. Unfortunately, the only plan that allows more than one Grid Bot is Pro and that normally costs a whopping $99 per month but I managed to get it on sale for $600 for a year (they have sales fairly frequently) so I can now have an unlimited number of bots.
How I configure my bots
I wouldn't be lying by saying I have "botted" every which way possible in the last 8 months, I have constantly tweaked my strategies and tried different ways of setting up my bots and I have found that what works for me is a 3% grid width width on a $1000 on a Cryptocurrency in the top 100 in terms of market cap (you can get the top 100 list here). The higher up the list the less risk but the slower returns, the lower down the list the more volatile but faster returns.
My strategy is that once I invest the £1000 it's gone. It ceases to exist. I believe that Crypto is here to stay so I in turn believe that whilst the value of my investment will vary wildly, it doesn't matter as long as it doesn't die completely. I only track the profit that the bot has produced and I keep $500 "Float" cash to maintain a constant value of $1000. When the coin goes out of the top of the grid (because the price has gone up a lot) I reset it again to $1000 and this lets me extract the profit. If it drops off the bottom of the grid (because the price has gone down a lot) I top it up from the float which brings down my average price. This all means that when crypto markets are down I don't make any actual income and when they're up, I get paid out. This means as long as I believe the value of my coins will go up over the long term, the bots will keep making profit indefinitely.
In term sof what actual values to put into 3Commas to setup a bot, it's actually fairly simple:
Above is the Grid Bot setup page and it's currently showing the configuration for a Bitcoin to USD bot.
The steps I take to configure the bot is as follows:
Pick my pair, I always use USD and a top 100 Cryptocoin. In this example BTC (Bitcoin)
Set my upper and lower limits. I use a spread of 30% (10 grids at 3%) so in this example the BTC price is around $46,600 so I add 15% for my upper ($53,590) and deduct 15% for my lower ($39,610).
I always use 10 grids which is the default anyway, I've tried less and more and I just find 10 is easy to understand and just works.
Finally, I set the (Amount for bot usage) to $1000 as my total investment and then simply hit create.
And that's it. All that is left to do is to scroll down to my newly created bot and hit the "Play" button. I get a pop up telling me the bot is going to make its initial investment and I always hit "Market Buy" to let the bot do it's thing and then just wait for the bot to start trading.
Then you should be good for as little as a few days or as much as a few weeks. The only time I intervene is if the price of bitcoin drops below the range I've given or rises above. In either case I hit the edit button on the bot, calculate new upper and lower prices based on the current price and then update the prices and reset the amount for bot usage back to 1000. By doing this, if the price had dropped out of the bottom of the range my $500 float money will have reduced (usually by around $100) and will get replenished as the bot makes more trades and if the price went out of the top, my float will exceed $500 (Usually by $100) and I skim that surplus off to my holding account on the exchange. At that point I can either convert that profit into traditional cash to reinvest in non-crypto ventures or I can reinvest it into more bots.
Don't forget the Taxman
There is a lot of confusion on how tax works in the crypto world and I'm not qualified to comment but I do know that your profits are taxable so don't fool yourself. I keep things simple and work on the assumption that every one of those $3.50 is taxable as income. That is the worst case scenario as it's still a little unclear as to what is classed as income and what is classed as capital gains. It's my accountants job to figure that out for what is likely to be 20,000 transactions for me by the end of the year so don't forget to keep some profit aside to pay the piper.
Overall I'm loving my Crypto Bot investment and truly believe it can be highly profitable if one approaches it with a plan and sticks to it without getting greedy or sucked in to deviating to try and make more money. I still don't really know if the profits I'm achieving are sustainable or whether I could lose everything in a crypto market collapse so my total focus is to cash out my initial investment over the next year and then reinvest every penny into more bots. I've set myself a target of owning 50 bots worth $1000 each and then to take all profit after that as income (which should completely offset our living expenses).
As of today, I have 37 bots with an average value of $670 so I'm two third of the way there but still have to extract my initial investment. I'd like to get the average value to $1000 by the end of the financial year (end of february) and then be completely cashed out by mid 2022.
Wish me luck!
I hope that this has been useful for the readers that requested it and wasn't too boring for those of you who have no interest in Crypto investing. Would love to hear any opinions in the comments below.
Until next time, keep living.