Exposing Bitcoin speculation: high frequency and arbitrage are now more expensive

Abstract: Compared with high-frequency trading in securities, precious metals, futures and other fields, which is subject to various restrictions such as time, platform, and region, the trading method of Bitcoin can be said to provide the most ideal soil for high-frequency trading.

TechWeb January 25th Article/Ma Xiaochao

Both platforms and regulators have the motivation to levy transaction service fees.

More than 10 days after the regulatory authorities announced the on-site inspection, the three major domestic bitcoin trading platforms announced on the same day that they would begin to charge a transaction service fee from 12:00 noon on January 24, 2017. The transaction service fee will be charged in both directions at a fixed rate of 0.2%, that is, the buyer and seller of a transaction will each pay a service fee of 0.2%.

Earlier, domestic Bitcoin platforms only charged fees for investors' withdrawals and "leverage", which was also the main source of income for the platforms. In terms of the "leverage" service fee, the platform generally charges interest on the leverage part on a daily basis. For example, Huobi.com's leverage daily interest rate is 0.1%.

Last week, the three major platforms began to "deleverage" (stop spot financing and currency financing), which had a significant impact on the platform's revenue. Now, the platform has begun to charge a service fee for each transaction, which can reduce revenue losses.

The two-way model of collecting a 0.2% transaction service fee starting from the 24th means that for a transaction of 1,000 yuan, the seller pays a 2 yuan service fee to the platform, and the buyer also pays a 2 yuan service fee, and the platform earns a total of 4 yuan.

The platform's imposition of transaction service fees is bound to greatly increase the cost of speculative behavior, and curbing speculation and drastic price fluctuations is also something that regulators would like to see.

Several common speculative behaviors on the Bitcoin platform include high-frequency trading and "arbitrage".

High Frequency Trading

High-frequency trading generally refers to high-frequency computerized trading that seeks to make profits in extremely short price changes. More than a decade ago, companies specializing in high-frequency trading in securities, precious metals, futures and other fields appeared abroad.

Compared with high-frequency trading in the fields of securities, precious metals, futures, etc., which are subject to various restrictions such as time, platform, and region, Bitcoin's T+0 trading, 7x24-hour opening, no price fluctuations, and theoretically no regional restrictions provide the most ideal soil for high-frequency trading.

In China, the arbitrage software used by some Bitcoin investors may not reach the ultra-high transaction frequency of professional high-frequency trading systems, but it is much more convenient and frequent than manual operations. "The recent problem is that when the market volatility is high, the API of the arbitrage software docking platform often fails," a Tebit investor revealed to TechWeb in early January.

In addition, there are some companies in the country that are suspected of engaging in fraud under the guise of high-frequency Bitcoin trading.

TechWeb approached a company claiming to be engaged in high-frequency trading of Bitcoin as an investor. The company stated that it has two large computer rooms with 25 independent servers, which can trade 1,000 times a day. The overall annualized return is no less than 300%. After investors hand over their funds or Bitcoin to the company, they can receive returns in the form of fixed interest or floating interest. The fixed interest is 1% per day, and the floating interest is determined based on factors such as the trading volume within 24 hours. The historical data range is 0.8% to 6%.

Another company that claims to be engaged in high-frequency trading of Bitcoin also advertised that after investors entrust their funds or Bitcoin to the company, the daily rate of return is 0.03%, the monthly rate of return is about 10%, and the annual rate of return is about 100%.

Annualized returns of 100% or 300% are very tempting for inexperienced investors, but in the eyes of those with a little experience, they are obviously exaggerated or scams. In January this year, a company called "Bitcoin Asia Lightning Trading Center" encountered a repayment crisis, its website was closed, and it was suspected of running away. The company claimed to be engaged in Bitcoin entrusted investment business and operated for about 9 months. Before closing, it paid investors about 1.3% return every day.

Regardless of whether the above-mentioned high-frequency trading is true or false, artificial multi-frequency trading with similar strategies that seek short-term and small price differences does exist on domestic Bitcoin platforms. The reason behind this is that the platform does not charge transaction fees and users can buy and sell repeatedly at will.

Nowadays, after the platform charges a transaction service fee of 0.2%, users will need to pay a handling fee of 2 yuan for each transaction of 1,000 yuan. Users who have accumulated small price differences through frequent buying and selling in the past need to consider in advance whether the scale of profits can cover the handling fee.

Moving Bricks

The so-called "moving bricks" means moving assets between different platforms to make profits.

The premise of profiting from "moving bricks" is the existence of price differences. A person who has been engaged in Bitcoin investment for a long time revealed to TechWeb that there has been a long-term price difference in the spot price of Bitcoin on several major Bitcoin platforms in China, but the price difference is not large, generally maintained at around 15 yuan, but "when the market comes (here refers to when the price fluctuates violently) it can reach hundreds of yuan."

"Brick moving" can be carried out between different domestic platforms, or across regions, because there is a price difference between Bitcoin in China and abroad.

The existence of the price gap between China and foreign countries has also sparked a debate on whether domestic Bitcoin platforms are suspected of violating foreign exchange policies. When the relevant regulatory authorities in Beijing reported on the on-site inspection of Bitcoin platforms on the evening of January 11, the announcement mentioned the inspection of the trading platforms' implementation of foreign exchange management.

Those who agree that there may be suspected violations of foreign exchange policies believe that investors can buy bitcoins denominated in RMB on domestic bitcoin trading platforms and then sell them on foreign bitcoin trading platforms, such as in the United States, so that RMB can be converted into US dollars, theoretically breaking through the restrictions of the foreign exchange policy. In addition, several major domestic bitcoin platforms also allow investors to open US dollar accounts and conduct bitcoin transactions denominated in US dollars.

Opponents believe that since the price of Bitcoin on domestic platforms is higher than that on foreign platforms most of the time, if investors buy one Bitcoin in China and then immediately sell it abroad for U.S. dollars, they will suffer losses (here referring to the U.S. dollar amount obtained is lower than the U.S. dollar amount obtained by direct conversion according to the RMB-U.S. dollar exchange rate). In addition, the price of Bitcoin fluctuates violently and is difficult to predict. If it cannot be converted into cash for a while, the losses may be very heavy. All these have raised the cost of speculation.

cool down

The price plunge has made investors cautious about entering the market, "deleveraging" has curbed the ambition of blindly pursuing profit amplification, and the collection of transaction service fees has increased the cost of speculation. These are bound to have a cooling effect on the overheated Bitcoin transactions for a period of time.

The trading volume of several major domestic platforms has declined significantly recently. Before the crash, the daily transaction volume of a single platform once exceeded 5 million, but in recent days it has been less than 1 million.