Your guide to the benefits and risks of automating your crypto trading.
Cryptocurrency markets offer 24/7 trading and are famous for their volatility, capable of substantial price shifts in a very short space of time. In order to take advantage of the market opportunities that may arise at any hour of the day or night, some digital currency enthusiasts have turned to cryptocurrency trading bots.
These bots allow you to automate your trades, execute them as quickly as possible and take the emotion out of trading decisions. However, using a crypto trading bot also comes with a certain level of risk attached, so keep reading to find out whether you should bot or not.
Crypto trading bot comparison
The table below outlines the key features of a selection of popular crypto trading bots. Make sure you thoroughly research the benefits and legitimacy of any algorithmic trading program before deciding whether or not you should make it a part of your trading strategy.
What are cryptocurrency trading bots?
Cryptocurrency trading bots are software programs designed to manage your cryptocurrency trades. These algorithmic trading programs interact directly with cryptocurrency exchanges to interpret market data and then place buy or sell orders on your behalf.
There are several different ways you can use a bot to execute your crypto trades. There are third-party bots that can be licensed to users in return for a fee, as well as bots that can be accessed for free through open-source platforms. If you’ve got the technical know-how, you also have the option of creating your own bot.
How do they work?
Most cryptocurrency exchanges allow you to interact with their platform via an application programming interface, or API. This is essentially an interface that lets you send and receive specific types of data to and from the exchange – in this case, a bot can receive price and market data from the platform and place buy and sell orders.
Designed to automate your crypto trading, bots monitor price movements and market trends based on a set of parameters pre-programmed by you. They can analyse details such as price, trading volume and a range of technical indicators across multiple exchanges to determine when to place trades based on your pre-defined trading strategy.
For example, you could program a bot to buy Bitcoin Cash when its price drops below a certain point, or sell when the price reaches your desired level. Once the price you want becomes available, the bot automatically executes the trade on your behalf.
Most bots are also highly customisable and can be programmed in line with your preferred trading strategy.
What benefits do crypto trading bots offer?
Why should you care about crypto trading bots? For the right type of trader, bots can offer a number of advantages:
- 24/7 trading. Unlike stock exchanges with their regular trading hours, global crypto markets are open 24/7. Of course, staying on top of market movements at all hours of the day and night is simply impossible for a human, so using a bot allows you to take advantage of opportunities you might otherwise miss.
- Fast execution. Market shifts happen quickly in the world of digital currencies. Bots are capable of processing market information and acting on it much more quickly than the average trader, providing the potential to respond quickly to opportunities as they arise.
- Reduced human error. Manually entering trade details yourself always introduces the risk of human error. By automating trade execution via a bot, this risk is reduced.
- Take the emotion out of trading. Humans can let emotions cloud their decision-making and overrule their better judgement, which can make it difficult to stick to a trading strategy at times. Crypto trading bots take emotions out of the equation, ensuring that trades are placed when certain parameters are met.
- Ability to diversify. Using a bot can allow you to trade across numerous accounts or try out various trading strategies. This can help you spread risk across a variety of crypto assets.
- Backtesting. Got an idea for a trading strategy but not sure whether it will work? You could use a bot to perform backtesting, which is where you test your strategy using historical market data to determine whether it could be a viable option. Of course, you’ll need to remember that past performance is never a reliable indicator of future performance.
Risks of using crypto trading bots
Before entrusting any of your money to a bot, make sure you’re fully aware of the risks involved in using crypto trading bots:
- Scams. Scams are one of the most common problems in the crypto trading bot space. It’s essential that you thoroughly research any bot before use to help safeguard your funds against scammers. For example, if you come across a bot that promises “guaranteed” substantial gains, this should sound alarm bells.
- Setting and forgetting. There’s a common misconception that once set up, a bot can simply be left to do all the hard work for you and make money while you sleep. This isn’t the case. Rather than being passive income generators, crypto trading bots need ongoing monitoring and adjusting as market conditions change.
- Poor-quality software. The quality of software varies from one bot to the next and using a poorly coded bot could cause you to lose money. That’s why you need to look for a reputable bot with a proven track record of success.
- Bad strategies. The crypto market is constantly evolving and trading strategies need to keep adapting to achieve success. If you choose a bot with an outdated or simply inadequate strategy, expect to lose money.
- Failing to set stop-loss limits. In the event of a “flash crash”, where the price of a cryptocurrency plummets rapidly, traders that have not set stop-loss limits could potentially suffer heavy losses.
- Crypto market complexity. There’s only so much that exchange data can tell you about what is happening in the crypto market. From tech developments to the online rumour mill, there are many other factors that can drive price movements.
Crypto trading bot strategies
Crypto trading bots can be used to implement a wide range of trading strategies. Some of the most commonly used strategies include:
Bot trading tips
There are plenty of simple things you can do to prevent your foray into crypto bot trading ending in tears. Ensure you:
- Don’t give your bot withdrawal access. In most cases, there’s no need to give a bot permission to withdraw funds from your account, so preventing withdrawal access can be a simple way to protect yourself. Of course, if you’re performing arbitrage trades between exchanges, you will need to grant withdrawal access.
- Don’t share your API secret. In order to put your bot to work, you’ll need to create an API key and secret on your chosen crypto exchange. API secrets are like crypto wallet private keys. If someone has your API key and secret they can place trades from your account, so never share with anyone.
- Use 2-factor authentication. Enabling 2-factor authentication on all exchanges, accounts, wallets and crypto programs can provide an extra layer of protection for your funds. As always, make sure you also set strong passwords.
- Backtest your strategies. Backtesting allows you to trial your trading strategies using historical data. While there’s no guarantee that a strategy which would have worked in the past will be profitable in the future, it’s worth running some simulations to determine whether it might be worth putting your strategy into use in the real world.
- Limit your losses. Use tools like stop-loss orders to ensure that losses are minimised when the market moves against you.
- Develop an understanding of technical analysis. The more advanced trading bots can assess a variety of technical indicators when executing trades, so developing an understanding of cryptocurrency technical analysis could help you get more out of your bot.
- Don’t over-commit. Bot trading can be quite complicated and may take a while to wrap your head around, so start with small amounts as you build your knowledge and confidence.
- Track your trades. Finally, don’t forget that your trades will have tax implications, so keeping records of your crypto transactions is essential.
How to choose a cryptocurrency trading bot
Make sure you consider the following factors when comparing crypto trading bots:
- Trading strategy. What strategy or strategies can the bot implement? What sort of market data and technical indicators can it analyse and what parameters can you program in?
- Ease of use. Some bots have pre-programmed strategies set up and ready to go while others allow you to program them however you want so you can implement your own strategy. The right platform for you may depend on your level of trading and coding knowledge, so make sure any program you choose is easy to understand and use.
- How to make changes. How easy is it to adjust your trading strategy and parameters? Is the bot designed to automatically rebalance your portfolio on a regular basis, or is it up to you to make adjustments as you see fit?
- Cost. Some bots don’t charge trading fees but many do. Compare the cost of different options and make sure you know exactly what you’re paying for.
- Longevity. How long has the bot been around? Is it a new program or does it have a long history of successful use?
- Reputation. Does the bot have a good reputation among the wider crypto community? Check online forums for reviews from other users to see if the bot is legit and if they would recommend using it?
- Exchanges. While most reputable bots will work with most reputable exchanges, make sure any program you choose will allow you to trade on the exchange(s) you want to use.
Cryptocurrency trading bots can be an extremely handy tool for traders, but only when used properly. They offer a handful of key advantages, such as being able to constantly interact with the market and taking the emotion out of trading, but they’re certainly not a “silver bullet” that can guarantee you’ll make a profit.
The many risks associated with crypto trading bots mean the best approach is to proceed with caution. If you know what you’re doing and you’re prepared to constantly monitor performance, trading bots can form an important part of your overall trading strategy. However, going all in and using bots as the be-all and end-all of your crypto trading strategy is not recommended.
Finally, make sure you thoroughly research any bot to be sure of its legitimacy and whether or not it could be a useful trading tool for you.
Disclosure: At the time of writing the author holds ADA, ICX, IOTA, POWR and XLM.