How Savvy Crypto Traders Gamed Coinbase's Latest Listing for a 35% Payday
If there's money to be made in the crypto markets, you can bet traders will be the first on the scene.
Such was the case at least last week, when Coinbase Pro, the cryptocurrency trading platform operated by San Francisco startup Coinbase, announced it would list the cryptocurrency 0x (ZRX), a move that put the "Coinbase effect" on display when ZRX surged nearly 40 percent on the news.
That perhaps isn't so much of a surprise. Coinbase is the largest U.S. cryptocurrency exchange by volume, and recently valued at $8 billion because of its millions of users, a common byproduct of new listings is a double-digit price surge.
Still, it wasn't just Coinbase that got a tip off about the listing prior.
Data shows prices for ZRX began to surge on other exchanges a few minutes before Coinbase made its official public announcement at 17:00 UTC. But while there were whispers online about the possibility of insider trading, a charge the exchange has denied in the past, there's another explanation that is perhaps more plausible.
Savvy traders may have been simply making use of well-timed trading bots, computer programs that automatically scout technical price charts and exchange APIs to identify actionable and profitable developments. The bots can then either immediately act on their findings by placing a trade, or send a signal to their users in the form of a message via social media.
It's often free to receive the signals, but bots capable of placing trades generally come at a cost.
Altcoinnotify, for example, is a bot used only for signals only, and is free on Twitter. On the other hand, more expansive and customizable bots like Cryptohopper are capable of placing instantaneous trades based on multiple signals, can cost $20 to $99 per month.
If traders would like more control over a bot, they can even program their own. Estimates suggest experienced programmers can put together the code in just a few days, though it remains a matter of expertise to search for the right buy and sell signals.
In the case of this particular listing, API bots like Lightingsignal appear to have been designed well enough to read Coinbase Pro's API and notice that it had added a new cryptocurrency to it's server. As can be seen in the image below, the bot sent out a signal via Twitter at 16:57 UTC, four minutes before the public announcement.
Cryptocurrency trader Johnny Moe explained how such a signal can give a significant advantage, putting them a leg up above traders seeking to place their own bets on exchanges.
Moe told CoinDesk:
"By the time a manual trader would see the API addition, and navigate the exchange UI, login with 2FA, navigate to the trading page for the coin in question, fill an order entry, etc., the price is already moving up from trading bots having made their purchases."
No small boost
Yet, in the hidden yet bountiful world of crypto trading bots, it's unlikely Lightningsignals was the only bot to convey the timely signal, particularly because even a small informational advantage can yield big results in the crypto markets.
Should a trader have acted on the notification from Lightningsignals, it would have allowed them enough time to purchase ZRX at a near 15 percent better price than the casual investor.
As can be seen in the above chart, the price of ZRX/USD began a noticeable increase at 16:56 UTC on the Binance exchange (the time of the signal), rising from $0.68 to $0.77 by the time Coinbase Pro made a public announcement at 17:00 UTC.
The price was able to record a 13 percent increase in that four-minute span and ultimately reach a 24-hour peak of $0.91 at 17:09 UTC.
If a trader was utilizing Lightningsignals or a similar API bot, he or she would have been able to capture as much as 35 percent profit whereas the public would have had to settle for a more modest 18 percent grain, bringing in nearly half the profit.
A well-kept secret?
Still, it's not exactly clear how widespread the use of bots is, or how many traders may have acted on such signals at the time of the 0x listing. (Coinbase did not respond to requests for comments about the activity).
Further, while successfully running a bot can greatly increase a traders' competitive edge, the process is easier said than done. A cryptocurrency trader known by his handle "Cryptohustle" explained he uses the tools for "market intel," but that he still prefers other trading options.
"These bots are just additional intel for me, I haven't built any strategies around them," he said.
Other traders argue that something bots can't do better than humans, at least for now, is fundamental analysis. "I don't use bots, because it is not necessary for me to find what I want. I look for projects that have a clear roadmap, achievable goals, leadership and a 'what tech/industry am I displacing," Cryptohustle continued.
That said, most traders accept that the bots are part of the market, and that, for the continued future, traders will continue to build strategies, some including the bots such as those that tracked the Coinbase announcement.
"There is no 'insider' info occurring here," Moe said, concluding:
"There is just technical wherewithal to access it. Or really, since there are publicly available feeds that share this information, just the social wherewithal to use it."
Coinbase image via Shutterstock
The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.