Don’t Underestimate Trading Fees in Crypto Bot Trading
Introduction
There is no such thing as a free lunch. If you want to make money, you will have to be willing to take risks that are acceptable to you. If you’re a crypto bot trader like me, you know that costs are an important component of a trading strategy. If you don’t take them into account enough, the performance of your strategy may be less than you had hoped.
In this blog, I will explain the different costs associated with trading crypto, how to incorporate them into your strategy, and ways to minimize them. I will also share some of my personal experiences on the topic. This article is not only relevant to fellow crypto bot traders, but also to other traders and investors. Let’s dive in!
What are trading fees?
Crypto exchanges have various ways to earn money for themselves, and trading fees are one of them. When you place a trade on a crypto exchange, you need to pay a fee for each trade you make. For a normal trade, this means you pay a fee two times: when you open the trade and when you close the trade. Trading fees can vary anywhere between 0 and 0.1%. The kind of trade you are making, your VIP level, the asset you are trading, and of course, the crypto exchange determine the amount you pay. Let’s start with an example:
On Binance Futures, the trading fee for a market order is 0.04%, which can quickly add up, especially for frequent traders or those using high leverage. For instance, a $10,000 trade would incur a $4 fee, and if you make ten such trades in a day, you would pay $40 in fees! With crypto trading bots, fees have a significant impact, especially if the bot makes a large number of trades with low profits, which may result in fees becoming a significant portion of your profit.
Traditional markets
Maybe you have experience in traditional markets, such as CFDs for futures. What blew my mind is how difficult it is to find out the trading costs for traditional markets. Most brokers are not transparent about the costs and how they are calculated. I guess one of the upsides of the rise of crypto exchanges is that all that information is available and open to the public.
What are funding fees
In crypto futures trading, funding is a mechanism that balances the contract price with the underlying asset price. It is a periodic payment that traders pay or receive every 8 hours to maintain the contract price’s equilibrium with the underlying asset price. The funding rate is determined by the difference between the contract price and the underlying asset price. For example, if the funding rate is positive, long positions pay short positions, and if the funding rate is negative, short positions pay long positions.
Suppose the BTC/USDT perpetual futures contract is trading at $60,000, and the funding rate is 0.01%. In this case, long positions will pay 0.01% of their position value to short positions every 8 hours. Suppose you have a long position worth $10,000 in BTC/USDT perpetual futures. You will have to pay $1 (0.01% of $10,000) to the short positions every 8 hours as funding.
The funding is paid between traders. This also means you could earn money on funding, sometimes significant amounts. I’ve seen a trader open a short position in ETH on Bitmex at the end of the 2017 bull market. He held it open for more than 6 months. Because the funding was high and most people on the exchange were long, he earned much more on the funding than on the short itself. He earned more than 1 BTC on funding over that period while he was only shorting 10 ETH.
Crypto bots & trading fees
I have seen several backtests of crypto trading bots that didn’t factor in trading fees and funding, causing the calculated profits to vanish, and the bot ended up generating a steady loss.
In general, the more often your strategy trades, the more trading fees will impact your performance. Also, if your strategy does trades with low R:R, the impact will be higher.
Most trading systems have the option to factor in trading fees in the backtest. Study how much fees you need to pay on your exchange with the asset you want to trade and enter that data into your backtest. Now re-run your backtest and see if it is still profitable.
If your strategy is no longer profitable due to the trading fees, go back to the drawing table.
You have multiple options:
- See if you can lower your trading fees
- Change your strategy
- Change your asset
- Change your exchange
Backtesting funding is more complicated. Funding is variable and changes every 8 hours. Also, you could receive funding instead of paying it. Most backtesting systems do not have the option to calculate funding into your backtest. In my experience, the strategies that I developed are pretty much funding neutral. That means that over a longer period of time, I receive roughly the same amount of funding that I pay. This may vary per bot trading strategy.
Selecting the suitable asset for your crypto trading bot
Selecting the appropriate asset or contract for bot trading is crucial. If you’re implementing a long-only strategy without leverage, spot trading might seem reasonable, but spot trading fees are significantly higher (usually twice as much) than futures contract trading fees. Switching to futures could reduce your fees, but crypto futures bot trading comes with additional expenses to consider, such as funding.
Minimizing trading fees while bot trading
To minimize trading fees, you could use limit orders, which have lower fees than market orders. You could also try to reach a higher VIP tier, as many exchanges offer lower fees for high-volume customers. Additionally, trading on higher time frames could result in a lower number of trades, which can help reduce fees.
Another way to reduce fees is to create crypto trading bots that focus on higher risk-reward ratios and a lower number of trades. It’s essential to choose the right exchange to trade with your bot, as fees vary significantly across exchanges. Also, consider the volume of the exchange since some exchanges may have lower fees but lower liquidity, which could result in lower fees but higher slippage while bot trading.
Conclusion
Trading fees are essential to factor in while trading, as they can eat up your profit if you do not take them into account. Trading fees can impact your choice of what asset to trade, which exchange you choose, and how your strategy works. It is crucial to find out what works best for you and your crypto bot trading strategy!
