3️⃣-2️⃣Why Are Profits Negative?
How to do automated Trading Works 🤖
Why Arbitrage Profits Can Go Negative – The Role of Pumping & Dumping 📉📈
💡 Common Misconception: "Arbitrage is risk-free." 🚨 Reality: Arbitrage profits can turn negative due to unpredictable market movements caused by pumping & dumping mechanics.
1️⃣ Understanding the "Pumping Effect" in Arbitrage
When an arbitrage bot buys a token on one exchange (low price) and sells on another (high price), it creates buy pressure on the first exchange.
This buying pressure causes the price to increase, reducing the profit margin.
As more traders (or bots) enter the same arbitrage trade, the price imbalance self-corrects, eventually eliminating the profit opportunity.
🔹 Example:
Bot detects TON trading at $2.00 on STON.fi and $2.10 on Binance.
It buys TON on STON.fi and sells on Binance, profiting from the $0.10 spread.
However, repeated purchases on STON.fi pump the price, making further trades less profitable or even negative if slippage is high.
2️⃣ The "Dumping Effect" & Why Profits Can Become Negative
On the selling exchange, repeated sell orders create sell pressure, causing the price to drop.
If the bot sells too aggressively, the price can fall below the initial buy price, resulting in a net loss.
🔹 Example:
The bot buys 100 TON at $2.00 on STON.fi and sells on Binance at $2.10.
After multiple trades, Binance’s price drops to $1.98 due to excessive sell pressure.
If the bot cannot execute its sell orders fast enough, it might be forced to sell at a lower price than its buy price, leading to negative returns.
[Example of Duming And Pumping Effect]
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