Why is my bot making less profit than the underlying coin?

Dear botbuilder, Crypto.bot trading in ETH only and took 10% while Ethereum went up by 20%!  Explain yourself!

This type of question comes on a daily base in a variety of flavors, one being more polite than the other. In both bear and bull markets our precious bot heroes are spending a lot of time justifying themselves, while in almost all cases the answer is straight forward. The bot acted rationally, the crypto market did not.
Very often these questions do not come from a lack of trust but more an attempt to better understand how these algorithms works. Therefore, I decided to use an example from the recent past to illustrate how bots behave and why it perfectly makes sense these things happen.

Let’s head into a real-life example.

For demonstration purposes I cut a few corners and use round numbers to ease the math. In reality it is far more complex but irrelevant for this illustration.

We go back to the beginning of May 2021. I have Crypto.bot running with 2850 USDT. Exactly 1 ETH at that time. What a coincidence.

Crypto.bot is in ETH for 100%.  On May the 2nd ETH hit the symbolic 3K. The so called “all time high” (ATH). While every vein in my body was shouting “To the moon!”, Crypto.bot started to see some orange flags. Its logic told him the risk of a correction became higher than the chance of continuing this steep upwards line. In an attempt to secure the profit it pro-actively traded 25% of in USDT.  The upwards trend continued and at 3.1K it secured another 25%.

While my emotions kept on shouting to buy more, my bot rationally decided to secure another 25% at 3.3K.

At that point I have 2350 USDT and 0.25 ETH in my portfolio. Against all odds, ETH kept on booming and went almost straight to 4K. On May the 6th Crypto.bot realized it was missing out too much and decided to buy again 50% of ETH at 3.5K.

The log file showed the below trades. I skipped a few and the actual numbers are slightly different but as mentioned before, for easy illustration purposes I simplified. In movie terms we would speak of “based on true events”.

Why is my bot making less profit
BOT performance: +11%
Ethereum performance: +19%

Conclusion

At certain thresholds, the algorithm decided to prioritize securing profit.  Would you really bet all your money that Ethereum would hit the 4K at that time?
Probably not. Crypto.bot did not either and unfortunately it missed some of the gain in his effort to secure some profit.

But then, would you have done better?

PS: If you want to know how it acted on the recent drop, keep an eye for my next post: “Lessons learned”.

 

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