Automated Crypto Trading Bots: The Next Big Thing into the Niche?
Following the wave of robotics reshaping the FinTech sector, millions of cryptocurrency users around the world are becoming increasingly interested in cryptocurrency trading bots. The attraction is simple. Trading bots, also sometimes called robots, not only relieve the pressures that come with trading by oneself, but they can also make better decisions and possibly outperform the market.
Here is a comprehensive guide to getting started with cryptocurrency trading bots. As you complete this guide, you’ll learn what trading bots are, their pros and cons, and possible strategies that can be implemented as well as what specific features to look for when choosing a trading bot.
What are Trading Bots?
The purpose of a trading robot is to automate the process of buying and selling cryptocurrency at the right time to generate profits. Do keep in mind that not all bots are profitable. In fact, many are not. But some of the best crypto trading bots can help you make a steady profit.
From the onset of the cryptocurrency boom in early 2017, crypto traction has skyrocketed. There are more cryptocurrencies, more crypto traders, and definitely more crypto markets to explore. No matter the selected market, traders cannot watch the market 24 hours a day, seven days a week, especially not one as volatile as crypto.
Steve Wozniak, Apple co-founder, and renowned tech expert, recently disclosed that he had sold all of his bitcoin holdings due to his fatigue with constantly checking the price. For even the most dedicated traders, it is impossible to spend most of one’s life analyzing cryptocurrency price charts.
Cryptocurrency trading can be particularly addictive due to the high volatility of the market. It is possible for Bitcoin prices to drop by as much as 25 percent in a day. The long-term investor may not worry about profiting from such fluctuations; however, active cryptocurrency daily traders can make a great deal of money from such fluctuations.
This is where trading bots come in.
A trading robot is a software program that uses APIs to communicate with financial exchanges, meaning you would need to utilize the official Binance API for your Binance bot. In addition to actively monitoring exchanges throughout the day, they are programmed to react according to predetermined criteria.
Companies have been using bots for decades to set the purchase and sale of commodities on global stock exchanges. The use of trading bots helps not only to automate the process of trading, but also to relieve its associated pressures on companies and traders.
In order to facilitate the purchase and sale of bitcoin and other cryptocurrencies, cryptocurrency trading bots operate on the same principles. They can implement a range of strategies, from trading and constructing custom indexing strategies to executing real-time arbitrage across exchanges. There is virtually no limit to what they can do. Every trading bot uses an algorithm created by the application developer to implement its trading strategy. If you are willing to plunge deeper into the details, read the following article for a closer look.
Trading Robots: How do they work?
All trading bots typically go through three major stages when trading – signal generation, risk determination, and, finally, execution. These three stages are at the heart of the mechanisms driving any true trading robot.
Signal Generator
It is here that the predictions are made. An algorithm will generate a buy or sell signal from data that goes into the signal generator. The bot considers the feed of past trading data it has access to and makes future predictions based on what it has been fed. Thus, it makes sense to keep in mind that a bot is only as good as its access to data and its team of developers. A good rule of thumb is to stay away from bots that only use “technical indicators.
Risk Allocation
Say the bot settles on a buy signal. What happens next is that it decides how much to buy based on that. Is it better to allocate all our capital to this trade or only a portion of it? Are we better off buying all at once, or should we buy at a steady rate? The bot apportions the risk for each decision, with high-risk moves getting lower investment, and low-risk ones getting more commitment.
Once this is settled and we know how much we wish to purchase or sell, the next step is the actual execution of the trade.
Execution
Here, the signals generated are finally turned into market activity. How the robot carries out a given operation is crucial, as there are several ways for a generated signal to be executed, each with different results.
If, for example, you have to buy $2,000,000 for 500 customers, you are unlikely to get a favorable deal by doing all of this in one transaction. Let’s say you have the same bot as 1,000 other people. All the bots acting at once would create a huge demand in the market, so that eventually, you are likely to be charged a much higher rate.
Each of these parts – signal, risk, and execution – requires its own set of algorithms and optimization processes. You will not achieve profitability if your bot ignores any of these aspects or fudges them.
Crypto Trading Bots Strategies
Using algorithmic trading, crypto trading robots automate and accelerate the trading process by running and processing complex mathematical formulas. The biggest mistake a trader could make would be to employ a trading bot without having a clearly defined strategy.
Having crypto bots does not spare traders the need to have a plan. This is even more of a reason why people who make the most gains with bots are traders with good skills and experience.
What are some common methods used in the algorithmic trading process?
Trend Following Strategy
This is the simplest trading strategy, where the bot responds to direct changes in market price. This method does not require complex algorithms, predictive analysis, or sophisticated AI.
Arbitrage
Arbitrage refers to the process of exploiting the differences in cryptocurrency exchange prices across the global market. Since there is no centralized exchange determining the price of a cryptocurrency, a function that is performed by the central banks with fiat money, prices differ from exchange to exchange.
For example, South Korean exchanges have historically had a higher price than U.S. ones, making trading between the two a lucrative endeavor. Traders can take advantage of this differential through trading bots, which trigger trades whenever a specific price differential is met. However, you have to keep in mind that cryptocurrency arbitrage is not a sure win strategy.
Market Making
The market-making strategy enables traders to profit from the spread by buying and selling large volumes of foreign currency. Market-making traders rely on trading bots to be able to deal with such volumes.
Pros and Cons of Cryptocurrency Trading Bots
Despite its strength, a trading bot is not a magic bullet. While the right trading robot, when used well, may generate significant profits, there are also several disadvantages and risks to consider before starting with one.
Benefits of Crypto Trading Bots
Eliminates emotions
Emotional trading is one of the most common crypto trading mistakes. Human traders may make erratic and impulsive decisions due to a fear of losing, especially considering the high price fluctuations in crypto markets. Using a trading bot eliminates this risk by only placing orders based on the data available and their predetermined parameters.
Effective
Human traders can only examine one cryptocurrency market at a time, but bots can scan and analyze several simultaneously, spotting opportunities that human traders might otherwise miss.
Incredible Speed
Cryptocurrency is a fast-moving industry where speed is critical. In carrying out a trade, a coin may lose its value as a result of the time it takes a human to complete it. However, bots can place orders instantly, enabling them to take advantage of opportunities as they arise.
Round-the-Clock Operation
Even the most dedicated bitcoin trader can’t sit in front of a computer day after day after day. However, a trader can monitor a market and choose to never stop trading just by employing a bot.
A trading robot essentially automates actions that are too complex, too time-consuming, or too difficult for humans to execute manually. These tasks can be quite sophisticated, from automating a single trading strategy on one pair of assets to intelligently routing trades between multiple assets in a diverse portfolio.
A few bots can implement an entire portfolio management strategy without continuous effort, saving enormous amounts of time for its user. To execute your strategy, bots can control your portfolio day or night without you having to be online constantly to place trades and adjust your portfolio.
What’s more, bots collect data faster, place orders more accurately, and crunch numbers faster than humans.
Drawbacks of Crypto Trading Bots
Monitoring is Necessary
It’s not enough to simply set a bot and forget about it. One often has to monitor its progress and make necessary adjustments. This is because a robot may sometimes fail to account for external factors that could affect the market, such as world events or breaking news, which are beyond the bot’s repertoire. Most crypto bots, for example, would miss a “black swan” event since decisions are made only on patterns, history, and current indicators.
Required Knowledge and Experience
Most bots perform best when reconfigured according to the user’s specifications, even though they may come pre-configured with trading strategies. This is to say that the user must have a solid understanding of how the market works and how to trade with a bot.
They Can Pose a Security Risk
Crypto trading bots communicate with exchanges using Application Programming Interfaces (APIs). APIs are software intermediaries that allow applications to interact with each other. However, due to the centralized nature of most bots and exchanges, APIs are vulnerable to exploitation by hackers.
Traders often have to take precautions like hiding their API key and not automating withdrawals. It is also important to consider a bot’s security record before getting one.
What is the Best Crypto Trading Bot?
In order to select the best crypto trading bot, it is recommended that you carefully read bot reviews and benchmarking articles. Fortunately there are many available on the web. In the following section, we’ll provide you with answers on how to pick the right trading bot. As we proceed, we will talk about aspects to consider before signing up for a crypto bot trading service and entrusting your portfolio to automation.
Team Reputation
A team’s reputation matters more than anything else. Hackers have exploited clever vulnerabilities to cripple unknowing users. As an example, hackers used trading APIs on Binance to pump the price of Syscoin. Hackers are shrewd, and having a trusted founding team is the first line of defense against them.
As you evaluate a team, look out for attributes that are indicative of a reputable one. For example:
- Past track record of its heads
- Colleges and companies they’ve been part of
- How long the developing team has been working on the bot
- Advisory board members’ reputations
- Who is funding the startup
- Where the company is incorporated
- The technical expertise of the founders
- Whether the bot’s code is open-source and open to optimization by the community
Use the information on this list to get to know the team behind the service before relying on them to automate your strategies. Ensure that the entire company can be held accountable for any potential wrongdoing, in addition to the specific team members. A project with a good team will be transparent about its origin, its members, where it is based, and any other relevant information.
Automated Strategies
Next, let’s determine if the bot we evaluate implements any valid strategies we are trying to automate. It is no use selecting a trading robot that only supports strategies that involve moving average crossovers if we want to rebalance our portfolio.
Make sure the trading bot supports the strategies we want to implement for our portfolio by looking at its website. Look for any configuration options they offer or hints at the level of involvement it requires from an end user. We shouldn’t use a bot if it helps us achieve our goals but ends up taking us more time than just implementing our strategies manually.
Support
The team’s level of support is another important consideration. If you need support or assistance with a bug, can you reach their development team? A bug that is not resolved for weeks could cause you to accumulate losses.
You can identify if a support team provides great customer service by considering:
If the team has an active Telegram or Discord channel, or any other active community where they answer questions?
Customer support responds promptly to questions and works to resolve issues.
They provide frequent updates on their Telegram and Discord channels.
Here are a few ways to determine the quality of support you will receive once you sign up.
Cost
Let’s face it. Pricing heavily influences our decision to use a trading bot for our portfolio. Our goal is to maximize our crypto, so lowering the monthly cost of a bot subscription allows more money to go into our portfolio.
Some bots are expensive. If you’re paying $1,000 for a bot, it better be doing something amazing. If not, the cost will drain your portfolio. If you had invested those funds, your portfolio would have grown. Choose the trading bot that fits your budget.
Ease of Use
Cryptocurrency tools are overly complex in design as a result of the market’s reality. The same can be said for trading bots. They can be incredibly complex to use. They have a variety of levers, options, configurations, and settings that can be overwhelming for a beginner.
As a rule of thumb, pick a bot that you are comfortable with. It may be better to take it slow at first instead of diving straight into open-source trading bots and trying to implement your custom strategies by flexing your development skills. You might want to try an easy-to-use bot that offers only a few core functions you need. By doing so, you can dip your toes in the water before you plunge into it.
Backtesting
A backtest is a simulation of a strategy’s performance over historical data. Consequently, we can better understand the strategy’s behavior under certain circumstances and may be able to predict how it will perform in the future. Nothing can be guaranteed, but this is the most robust way of evaluating strategies.
Backtesting should be a feature of the bot we choose. Unless a strategy has been backtested, it is not ready for implementation.
Are Crypto Robots the Next Big Thing?
Will bots make you rich? It’s not exactly a straightforward answer. Can they make you rich? Yes they can. But it’s not like waving a magic wand. It is possible to lose money to trade operations overseen by a bot, even despite its AI capabilities and sophisticated algorithms. This is even more likely to happen if the trader lacks experience or does not have good traditional trading skills before getting started.
Bots are not the holy grail, the shortcut to unimaginable wealth. If they were, everyone would use them. But they work, and they offer lots of perks and advantages for both the average and experienced crypto trader.
With evolving technology and the exponential growth of the AI industry, bots will only become better, stronger and more popular. As it stands, it’s never too late to get started.
Main image: by AlphaTradeZone, on Pexels
