Crypto trading bots are computer programs created to algorithmically execute trades based on a trading strategy. They are particularly popular in the crypto space due to the volatility of the markets.
The cryptocurrency world is a fast-developing space with lots of innovations emerging almost every day. From new fundamental information to new tools and techniques, traders and even casual investors have to find new methods of growing their portfolio while retaining their position at the bleeding edge of the industry.
As the boom and bust cycles of crypto-assets continue, trading cryptocurrencies is quickly becoming the new trend as retail investors flock to the market to cash in on the opportunity. For this reason, crypto trading bots have become quite popular as they play a key role in successfully navigating the markets.
In this article, we will guide you through understanding what a trading bot is, how they operate and how you can use them to maximize your crypto trading ROI.
A trading bot is a software program designed to time the market and executes buy and sell orders automatically. Ultimately, a trading bots helps the trader automate trading strategies and potentially outperform the market. Therefore, instead of manually entering and exiting trades on an exchange, the trading bot can be programmed to access exchange and execute trades on behalf of the trader.
The purpose of a trading bot is to add speed and precision to a trader’s trading strategies. Trading bots can be programmed to execute a variety of strategies ranging from real-time arbitrage across different exchanges to dollar cost averaging on a specified asset.
Trading bots are quite popular in the traditional financial markets. However, the crypto space has democratized the use of trading bots as anyone can access a crypto exchange and deploy a trading bot as opposed to the traditional financial market where brokers are the only ones with direct market access (DMA) and bots.
Crypto trading bots have become popular in the crypto space thanks to the much-publicized volatility of cryptocurrencies. Granted, a volatile market can provide traders great profit opportunities, however, such markets can also deplete a trader’s portfolio in a matter of hours. To prevent this from happening, traders deploy automated trading algorithms and set up stop-loss orders to mitigate risks and maximize profits.
Crypto trading bots work similarly to any other software or application that processes input data to produce an output. In the case of crypto trading bots, the bot works by accessing input data from a crypto exchange and uses that data to make a decision based on built-in trading strategies. For instance, a user will give the bot access to an account on an exchange through an API (application programming interface) public and private key. API keys are a way of informing the exchange that a Bot is accessing the exchange and therefore seeking permission to have access to API-specific data on the exchange.
Once access is approved by the exchange, the crypto trading bot will immediately begin scouring over the data available on the exchange and use that data to determine the right timing for entering and exiting a trade.
The capacity of any trading bot, once deployed, can range from performing simple repetitive tasks to setting up complex trading strategies that are impossible for human beings to execute or calculate.
Traders can significantly improve their trading strategies by simply executing a trading bot. in the crypto space, a trading bot can be used to rebalance your portfolio, collect data and make timely and smart decisions that are difficult to execute manually.
One of the common situations that warrant the use of a crypto trading bot is when a trader needs to accurately time a trade entry or exit point. In a fast-paced crypto trading environment, a single trade can have an enormous impact on your portfolio. As the crypto market never sleeps, a bot can be programmed to keep an eye on the market for the right entry and exit point.
A bot can also be used to simplify complex trades. For example, a trader looking to execute complex arbitrage strategies that require routing trades through numerous trading pairs and across different exchanges will need a bot to perform those trades. The bot will determine every single trade pair carefully, analyzing and comparing prices across multiple exchanges while timing the market to find price inefficiencies that can be exploited. While the entire process seems straightforward, it can quickly become too complex for a human being especially if there are hundreds of trades to be executed within a limited period.
Apart from executing complex tasks, a bot can be useful for executing trading strategies that require you to perform repetitive time-consuming tasks. For example, if your trading strategy involves hourly portfolio rebalancing, you will need a crypto trading bot to do the work or else it will take you days of relentless trading and alarm setting to complete the work. Another example where crypto trading bots are useful is in market making. Since the market-making process entails buying and selling on the bid and asks side of the trading pair to capture the spread, a bot can automate the task and keep running 24/7.
The nature of the crypto market renders crypto trading bots extremely useful in speedily executing momentary trades to capture market developments in real-time. Besides, market shifts, especially in the crypto space, happen quickly and unexpectedly therefore having a bot run your trades is a sure way of responding accordingly when the market shifts.
A well-executed crypto trading bot can significantly reduce human error or emotional trading. While it is wise to buy at the bottom of the market and sell at the top, most manual traders easily get caught up in the FUD and FOMO of the crypto markets and end up buying at the top of the market and panic selling at the bottom. Setting up a crypto trading bot to execute trades based on pre-determined trading strategies eliminates the chance of getting caught up in the emotional roller coaster of fear, greed, and FOMO.
As there are a variety of trading strategies out there, a crypto trader can take advantage of a bot to test the viability of different trading strategies determining the strength, weaknesses, and rewards of the strategies. Furthermore, a trader can diversify and test the strategies on different crypto exchange accounts to find a custom strategy and platform suitable for producing the results that the trader is pursuing. Not only does this spread the risk to a trader’s portfolio but it also instills discipline and rational decision-making in the trading process.
Like any other technology, crypto trading bots have limitations.
To begin with, crypto trading bots heavily rely on the trading strategy programmed into the software and this can be a disadvantage especially when sub-optimal trading strategies are deployed. As most crypto trading bots are not intelligent enough to tell the difference between high-quality and low-quality trading strategies, a trading bot will continue to execute trades even if it is using a failing strategy. For this reason, most sub-standard trading bots require a lot of careful monitoring.
Furthermore, a bug in the trading bot can affect the results of the trading strategy. While trading bots vary from one to another, most crypto trading bots are limited in their capacity to predetermine the occurrence of black swan events in the market. As market anomalies are rife in the crypto market, an unexpected event can result in incorrect trades. In such a case, the best option is to set a stop-loss limit order with every trade.
Lastly, despite the success that can be achieved through using a crypto trading bot, there are also several scams to beware of. Traders looking for the best crypto trading bots have to conduct plenty of research and due diligence as the crypto market is still unregulated.
You can never be in safer hands than with a trading bot provider who is also a broker for Binance (one of the biggest crypto exchanges). With over 100,000 users, not to mention over $5 billion in trading volume per month, Pionex is a rising start that boasts of automated crypto trading tools designed to assist smart investors in implementing their strategies. Pionex offers a dozen trading bots, each designed for different markets and different situations. A good example is their Grid Trading Bot that helps traders buy low and sell high within a specific price range. What’s most exciting about Pionex is the fact that they offer access to their bot for free while charging maker and taker fees as low as 0.05 percent.
Compared to Pionex, Cryptohopper has been around a bit longer as the company was registered in 2017. Cryptohopper offers one of the best auto trading platforms with an entirely cloud-based installation capable of operating round the clock. The platform comes with an intuitive dashboard and access to a growing list of professional market analysts and traders. The platform’s users can take advantage of intelligent algorithms and expert level analysis to target the best crypto assets for profit. In addition to its beginner-friendly interface, Cryptohopper comes with resources such as the Hopper Academy that gets new traders up to speed on how to use the trading bots.
Even though Coinrule is one of the new kids on the block when it comes to trading bot platforms, the company has proven to be a qualified provider of auto trading tools that suit both advanced and beginner traders. For instance, the Coinrule auto traders feature support for popular crypto exchanges such as Binance, Coinbase Pro, and Kraken to mention a few. The platform also comes with 130 trading strategy templates to pick from and a capacity for customizing and testing the performance of different trading strategies. To top it all off, Coinrule features military-grade encryption which is great for securing your investment while you trade.
If you are looking for a crypto trading bot with the capacity to trade any altcoin pair, Haasbot can be a good fit. The company behind the platform is one of the most experienced considering its founding in 2014. Without a restriction on the maximum limit for altcoin pairs, Haasbot users can backtest strategies, schedule 24-hour trading strategies and fully customize trade bots. The platform supports compatibility with a majority of the largest crypto exchanges.
While it is important to have a crypto trading bot that automates your trades, Shrimpy goes a bit further and adds a social trading experience to the mix. Distinguished as a premier crypto portfolio management service, Shrimpy offers novice traders an avenue for copying the trades and straggles of expert top traders at the click of a button. What’s more, the Shrimpy API provides developers a universal crypto exchange tool that can be used for building custom trading bots. With support for a wide range of crypto exchanges including Binance, Bittrex, and Kucoin, the Shrimpy platform features strategy backtesting, portfolio rebalancing, and index fund automation to mention a few.
Now that you understand what crypto trading bots are, how they work, and some of the best options in the market, let’s identify some key factors to consider while choosing the right crypto trading bot for your needs.
When it’s all said and done, a bot’s price will be the biggest factor for many traders looking to maximize their profits. While several auto trading service providers offer free services, they reserve high-quality features such as AI integration and access to multiple trading strategies for their premium products.
If you are a beginner, the best option is to learn the ropes with a free account and use the rest of your funds on your portfolio. On the other hand, expert traders looking for specific tools to advance their trading can go for premium trading bots as long as the price fits the budget.
It is important to pick a trading bot platform with an active Telegram and Discord community as it is easier to get answers to questions when trouble arises. Like any other software, crypto trading bots are bound to have bugs, having access to a supportive customer support team or an active community of users can help you find solutions quickly.
The transparency and reputation of the company behind the trading bot is a crucial factor to consider while picking a crypto trading bot. While searching for a reliable trading bot, consider the company’s reputation on advisory boards, their source of funding, and the experience of the team working at the company.
Crypto trading bots are only as profitable as the strategies they use to execute the trades. While many crypto traders use them to yield high profits, not all trading bots are reliable and efficient. It is important to consider the backtesting capacity of a crypto trading bot to determine its level of performance. Before committing to a crypto trading bot, spend some time evaluating the strategy as you learn more about the bot to discover the best configurations.