Cryptocurrency trading bots are intriguing. They automatically buy and sell cryptocurrencies while, theoretically, generating profit. Most of the available bots on the market, however, are not profitable. It is most likely that the most profitable crypto trading bots are proprietary and not available to the public and which you keep for yourself as your holy grail.
Trading bots trade through algorithms or so-called trading strategies. For a bot-based trading strategy to be effective, the bots should generate a profit that is greater in risk-adjusted terms – that is, your positive gains relative to the negative gains you’ve suffered – than had you bought the same coins and just hodled.
What Are Crypto Trading Bots?
Crypto trading bots are programs and scripts allowed to automate cryptocurrency asset trading on your behalf. They automate not only the trade, but in some cases, they also make analysis and interpretation of market statistics. They gather market data, interpret it, calculate the potential market risk, and execute trades. You can set up a crypto trading bot to purchase more Bitcoin when the BTC price goes lower than a specific limit.
How do crypto trading bots work?
Most sophisticated trading bots have three moving parts: A signal generator, a risk allocation algorithm, and an execution script. The three moving parts incorporate various functions, and all need their own distinct algorithms and optimization processes applied.
1. Signal Generator
The signal generator is how predictions are born. There will be certain data that goes into the signal generator and buy or sell signal pops out the other side.
2. Risk Allocation
The buy or sell signal dictates how much to buy and therefore, how to allocate risk most effectively. The answer determines how much of one’s overall capital is invested into a certain trade.
One issue with bot-based trading is the execution of trades. If you are using the same bot and strategy as many other people, you could end up with unfavorable pricing and entry points.
Market Data Analysis and risk prediction
The bot module collects raw market data from different sources to estimate the risk or benefit for whether to buy or sell a specific cryptocurrency asset. Many bots allow users to customize which data to be analyzed and go into the signal generator sector to get refined results. The module uses market data to calculate the potential risk of the market and to decide how much to invest or trade based according to the pre-decided algorithm.
To decide when to sell or buy assets, the bot will use an API. An API is a programming interface or a part of a software system that is made available for other programs to connect. In this case, it is the API of the exchange platform where the bot should execute its trades. You might want to avoid buying tokens in bulk. On the other hand, some situations call for immediate purchases, where the execution module comes to its best advantage and takes care of such aspects.
The advantages of Crypto Trading Bots
The core benefit of a crypto trading bot is efficiency.
Trading crypto assets using a bot is efficient because it eliminates human error. If the bot receives the correct data and uses suitable algorithms, it can trade assets with a better chance of profit. Moreover, the bots work around the clock, 24/7.
Limitations of Crypto Trading Bots
Despite all benefits and advantages of a trading bot, the bot has some limitations. A crypto bot will not be able to decipher the market impact of a Force Majeure event like a worldwide lockdown. In these situations, human reasoning is indispensable and can complement a crypto bot-based trading strategy. Another important aspect is the quality of the coding and algorithm of the bots, developed by the user. If a bot is poorly coded, it might not perform well or during certain conditions. A bot should understand the ideal time to make the final purchase, and once deployed, it must carry out its trading actions with lightning speed.
How to start bot trading?
There are many bots on the market. The trading bot services will integrate with multiple cryptocurrency exchanges and charge you a monthly or per-transaction commission. If you need customized control and results, you can build your own crypto trading bot. You can either develop it from scratch or use a platform that allows you to customize the bot. The article “Medium, Let’s write a cryptocurrency bot. (part 1)” could help you start to create your own crypto trading bot from scratch with an extensive how-to.
What is the difference between a trading bot and a human?
Robots operate in some cases magnitudes faster than humans and don’t need to sleep. Humans can become very emotional, while robots are not driven by greed or fear. They’ll always do what’s statistically most likely to win. Furthermore, robots are fast and process gigabytes of data per second compared to humans that simply can’t process so much information in such a timeframe. Bots offer many benefits insofar as how well they complement humans, however, this requires that the bots are well-designed and the inner logic to their trading patterns provable. Humans complement bots as well, particularly with the human abilities of subjective thinking when a particular piece of information doesn’t have a specific outcome attached and lateral thinking.
Basic types of trading algorithms and strategies
Depending on your trading needs, two different types of trading algorithms exist. You can decide to use only method or mix them.
The Momentum strategies entail assuming prices which have increased will continue to do so. If this is true, you buy and vice versa.
The Mean-reversion refers to the hypothesis that, after a certain increase in price, the prices would be due for a pull-back, in which case you would sell your holdings. Mean conversion strategies win more than they lose, albeit with a smaller gain to loss ratio than a momentum-based strategy.
How Trading Bots Work with Cryptocurrency Exchanges
Most cryptocurrency exchanges offer an API that allows you to interact with their platform. They have an interface that lets you pull data from the exchange and make specific changes to your account using your own program.
The API key generated via the exchange allows you to connect your trading bot with an exchange. Put your key and the related “secret” in the bot to access the API. Don’t share your secret, as it acts as your private key or password.
Using a trading bot + API allows you now to execute trades programmatically. You can buy or create a program that executes a specific trading strategy that you or someone else has designed.
Are Trading Bots Profitable?
There are different opinions on whether crypto trading bots are profitable in crypto trading compared to a traditional buy and hold strategy. One main hurdle is the disconnect between the knowledge base of professional investors armed with bots versus the hackers that build these sorts of algorithms for the public.
Whether or not a trading bot is profitable depends on the accuracy of the software, including the API, as well as the quality of the strategy your bot follows. Market factors can also affect the performance of your bot.
How to Get Started with Bot Trading via existing bot trading platforms?
If you aren’t going to build your own bot from scratch, you can find many existing programs online that can help you get started and build a better strategy. Important is to be sure to backtest these bots first. Here is a list of options:
- Cryptohopper – Runs on desktops using cloud-based technology to work around the clock. The bot is easy to use and comes with an external trading signaler and runs on autopilot. Other features include templates, trailing stops, technical analysis, and backtesting.
- 3Commas – Trade multiple crypto coins simultaneously on this cloud-based bot. The bot can be configured with Bittrex and Binance.
- io – an innovative trading bot where you configure the strategies with a drag-and-drop editor. The interface is easy-to-use and newcomers and the bot allows you to follow pre-configured strategies.
- Haasbot – Compatible with exchanges like Bittrex, Huboi, etc., this bot is best for analyzing market movements and automating trades. Customize your own trade strategy using Haasbot.
- Hummingbot – A community-driven open source project that aims to democratize algorithmic trading by making sophisticated high-frequency trading strategies freely available to everyone in the world. We believe this will lead to a more open, fair, and inclusive global financial system.
- Gunbot – This platform allows to automatically execute trading strategies with innovative strategies, speed, extreme flexibility, and a user community. Gunbot runs on your computer, whether you have Windows, macOS, Linux or Raspberry Pi. If you are a beginner, there are strategy presets for beginners.
Now you know how to get started with crypto trading bots. As stated above, many people are quite skeptical about the viability of crypto trading bots, which is why bots should only be one part of an overall trading strategy that you’ve developed after research and backtesting.