Beware of the arbitrage trap of Bitcoin programmatic trading

Today, when I was daydreaming, my mind suddenly opened up to a way to make money. The more I thought about it, the more reliable it seemed. I talked to an old friend, an old hacker, who was also doing Bitcoin arbitrage. He thought the idea I talked about was still correct, but later on it became more and more wrong because the entire ethics and value orientation had problems.

Well, it’s just an evil thought. Since I don’t plan to put it into practice, I’ll share it with you.

Background: There are many Bitcoin trading markets, both in China and the United States. There are price differences between different trading markets. Because of the price difference, there is theoretically room for profit. Being a porter is an opportunity for low-risk arbitrage. Someone shared a Bitcoin arbitrage plan on Zhihu. There are also related arbitrage open source programs on sourceforge. I have talked about this with old hackers before. They built the open source arbitrage program in minutes, threw it online, adjusted the parameters, and started making money. Although this does not make much money, it basically does not require investment of energy, and does not require much research. It is a low-risk and low-cost way to make money.

I know young entrepreneurs who have used this to earn tuition fees. Of course, if any readers cannot distinguish between arbitrage models and speculation on Bitcoin, please close this article. In the past, when I talked about something similar to Bitcoin arbitrage, someone would come out and say that the current value risk of Bitcoin is so and so, and they are not the same thing.

But what I want to talk about today is not Bitcoin arbitrage, but reverse thinking, which is the pitfall of Bitcoin arbitrage.

Version 1.0

Let me first talk about a basic idea. Suppose there are many Bitcoin arbitrage programs running in the market, and there are a number of porters who are trying to make money in different markets (I believe there are). Now suppose there is market A, with a very small transaction scale and inactive trading, but it also exists as an information data source in the arbitrage system; market B has a large transaction scale and active trading, so, in market B, I hoard Bitcoin when the price is stable, and then suddenly increase the buy order in market A, and suddenly raise the transaction price of A at a low cost; then all the porter programs discover the huge price difference, and their numerical models feel that there is huge arbitrage space, so they start to execute buys in other markets, so the market price begins to be pulled up by these porter programs, taking the opportunity to ship in market B, cancel the buy order in market A during the time difference, and walk away with a profit.

An important factor here is that Bitcoin transactions have time costs. Even if there is a huge price difference, it is impossible to complete transactions and transfers quickly. In the normal trading model, the arbitrage program will evaluate its risk value, and what we need to do is to achieve maximum market manipulability with minimal costs, thereby invalidating the risk assessment of all arbitrage systems.

Well, there are many assumptions in the above scenario, but these assumptions are also artificially controlled.

Version 2.0

Bitcoin arbitrage is a low-risk arbitrage method. If you promote this concept on Zhihu and various platforms, and then pretend to be Lei Feng and release a low-risk arbitrage open source software, and write a very detailed Chinese tutorial on how to build it, what kind of people are the most lacking on the Internet? People who dream of others teaching them how to make a fortune out of nothing, right? This open source system will soon be popular on the Internet, and then you need to leave a backdoor? A Trojan? Nothing is needed, as long as the business logic implies the degree of cooperation with this kind of A market fluctuations, and the strategy is also ok when running normally. These people can also make some pocket money every day. This kind of ready-made open source software has it all, just copy it, but in terms of risk control, the slightly targeted risk assessment of the abnormal fluctuations you intend to create is numb. These people who use open source to make money will never seriously evaluate the business logic and risk control logic. Even if a few people find this problem, they will not realize that it is intentional. At most, they will correct it themselves, which will not affect the overall situation.

By doing this, a bunch of arbitrage programs you designed are running on the Internet, a large amount of funds are unaware of potential risks, and all of them are unattended.

On a windy and moonless night, market A suddenly fluctuates abnormally, so the arbitrage system buys crazily according to the business logic you designed, and you happily cash out a large amount...

Version 3.0

Market A is actually a alias market that you completely control, designed for this scam. The active players and transaction records on it are actually you and your various aliases. It is extremely difficult for outsiders to register and enter. After entering, there are various network errors and program bugs, making it impossible to have fun. However, the open source system you released has set Market A as one of many trading markets, but in fact it has no presence in normal times, so who cares?

In this way, you control market A and the open-source arbitrage system, and even save the cost and risk of creating volatility in the early stage. As long as these control channels are not exposed, many people who get hurt may think it is just bad luck. Leeks can be harvested again and again.

postscript

Playing with fire is risky and the law is not lenient. I'm just thinking about it and I won't really do this.

The general scope of this gameplay is an immature trading market where there is a market price difference and arbitrage space and a certain transaction scale.

But let’s rethink this idea.

Various arbitrage strategies and a large number of unattended programs are being executed in many trading markets. Once someone finds a weakness in the business logic and launches an attack on the business logic flaws of the arbitrage program, it is possible to achieve huge profits. If the arbitrage program with hidden business logic flaws is deliberately open sourced, and if certain trading markets can be controlled internally to drive a chain reaction of arbitrage programs, the benefit space of this behavior will be even greater.

Postscript

Hiding business logic flaws in open source arbitrage systems is the worst possible approach.

Going up, the logical flaws are hidden in the classic arbitrage algorithms, and even in the papers published in some well-known economic magazines. Many trading systems actively introduce such strategies and logic.

Going further up, it is hidden in the classical economic theory and the trading rules of the trading market. Take advantage of the loopholes in the rules that only you understand and make risk-free arbitrage.

Then, do you really think that these are just imaginations?

Author: Cao Zheng, WeChat: caozsay