This browser does not support the video element.

The Top Coins > Blog > Cryptocurrency Education > Crypto Trading Bot: Its Rise And Impact on The Crypto Trading Market

Crypto Trading Bot: Its Rise And Impact on The Crypto Trading Market

03 May 2021

As a new and speculative asset class, cryptocurrency attracts the most adventurous investors—particularly the new generation of individuals open to technological innovation and are willing to take risks to build the digital economy. However, with the recent bullish market came a wave of mainstream interest in cryptocurrency investments, bringing in newcomers to the volatile world of coins. 

In a market that experiences massive price fluctuations, the difference between profit and loss can be determined in a matter of minutes. However, it’s impossible for humans to pinpoint, with 100% accuracy, the most optimal time to close a trade, hence limiting opportunities to earn from random spikes and dips in a coin’s value. This is where crypto bots come in—and they might be able to help make trading a lot less stressful for you. 

Understanding Trading Bots 

Crypto bots are essentially custom programs that are written to automate the cryptocurrency trading process for you. The investment process usually involves you, the investor, researching which coins to purchase and subsequently making buying and selling decisions based on how the market moves. 

However, with the extremely volatile crypto market (which is hungry for stability), which can sometimes only hold a 10-20% spike or dip within a few minutes, it’s extremely important to be hyper-aware of price fluctuations 24/7—an impossible feat, even for the most prodigious professionals. Imagine waking up one morning and finding out that you’ve missed the opportunity to score a few thousand from an overnight spike in Ethereum (ETH). It’s not a good feeling, most likely! 

In contrast, crypto trading bots can be programmed to analyze and interpret market data based on statistics, average prices, market behavior, and other quantitative factors that can be coded into the software. The bot will then put all this information together and make the investment decisions for you, even while you sleep. Think of it as a financial assistant, except it’s usually much more affordable—and sometimes free—and always available, compared to hiring a consultant. 

Different Types of Trading Bots

There are various crypto bots available in the market—each catering to a different trading strategy. It’s best to look into the options available and settle for one that closely matches your investment behavior. 

The HodlBot 

A personal crypto trading HodlBot is a simple, beginner-friendly type of crypto bot that allows you to manage your entire portfolio on a single platform. Unlike more complex bots, where you have to manage your assets across various exchanges, this option allows you to do all the basics without interacting with an exchange. It’s often used as a portfolio manager, with the most popular being HodlBot.

The DCA Bot

DCA stands for Dollar Cost Averaging, a concept that acts as a foundation for DCA bots on the market. This strategy requires you to determine preset intervals in which the bot will implement buy and sell actions. This function will prevent the program from doing a lump sum investment, which can be detrimental when the prices are too high during the predetermined transaction time. It’s a great way to mitigate risk while only transacting at specific intervals. Automating trading 3Commas is an example of a DCA bot with plans for any stage of your investment journey. 

The Arbitrage Bot 

An arbitrage bot is a unique program that’s trained to take advantage of crypto price discrepancies across exchanges. Prices across exchanges are never the same, as most trackers take the average or most recent closing value of a coin in a specific pool of exchanges, causing discrepancies across the global market. Because bots can quickly scan through all the exchanges available to you, they can find an exchange where the price of a coin is low, purchase it, then quickly resell it on another exchange where the same coin costs more. This process requires robotic precision and timing, hence why bots are favored in this regard. The Blackbird Bitcoin Arbitrage is one such example—though it isn’t recommended for beginners! 

The Technical Analysis Bot 

A technical analysis bot is ideal for beginners and non-technical investors who don’t concern themselves with the ins and outs of graphs and complex historical data. These bots come with platforms that summarise the information for you, so there’s very little work on your end. These include automated trading and backtesting, which will allow you to simulate trading strategies based on historical data. Superalgos is a free option with a robust technical analysis offering. 

There are plenty of crypto bots apart from the above, many of which offer mixed capabilities. However, it’s incredibly important to shop around and find reputable software as scams are rampant in this niche. It’s recommended to check Reddit and other crypto communities for user reviews and more information about the crypto bot you’re interested in before trusting it to handle your funds. 

Why is Algorithmic Trading Attractive?

Crypto bots are growing increasingly popular among cryptocurrency investors because they allow you to take advantage of the small windows of opportunity in a highly volatile market. A single minute can make or break your wins or losses, which is why employing an AI to do the clerical work can speed up and optimize the process. 

Moreover, trading bots are highly customizable. In fact, you can develop one on your own if none of the options currently available strike your fancy. However, for ordinary investors, finding a suitable bot and training it to invest based on specific patterns is usually enough to merit profitable results. On that note, bots are not programs that you can leave alone to do their job for months—there is still involvement required on your end. 

You need to give the crypto bot a set of instructions on what to do in specific situations—a function that attracts most to this system as it allows you to change up the rules based on your preferred investment strategy. For instance, a conservative and aggressive investor can use the same crypto bot, but their software will react differently to a 2% drop in Bitcoin prices. 

How Does Algorithmic Trading Work?

In a nutshell, a crypto bot comes in the form of an API, short for an Application Programming Interface, which allows the software to directly interact with exchanges on your behalf. It will implement actions based on the predetermined strategy and parameters that you have set—made possible through a smart algorithmic process. 

However, the bot isn’t human, which means that it needs to be told exactly what to do, or it might put you at risk of losing your funds to hacks and bad trading decisions. You can set permissions for the bot, like making it so that the software can make buy and sell transactions but cannot make any withdrawals. 

The Positive Effects of Trading Bots on The Crypto Market 

Cryptocurrency bots encourage trading—even among less seasoned investors who are still learning the ins and outs of the market. By allowing 24/7 trading with no interruptions, you can reap the most out of volatility as long as you employ the right strategy at the right time frame. 

From an investors’ perspective, bots also allow you to approach trades strategically. Day trading is an emotional battlefield—the constant spikes and dips can put you in a permanent panic-selling mode, which can cloud your decision-making abilities and end up closing bad deals. Afterwhich, you might go on a revenge trading spree and end the day with even more losses than before. Crypto bots offer a fully quantitative and straightforward trading experience—you can monitor them doing the job for you if you’re prone to emotional trading. 

A single bot can also employ the same strategy across various exchanges, essentially increasing your trading capacity multiple times over. This process is beneficial to the overarching cryptocurrency market, as larger and constant trading volumes will keep the market liquid, preventing it from falling to a standstill. 

The Backside of Crypto Bots 

There’s a dark side in any light—and the same applies to crypto bots, which have just as many downsides as upsides. For one, you need a good deal of market knowledge to comfortably use the software. While some crypto bots are beginner-friendly, you won’t be able to maximize the program’s capabilities without teaching it what to do on specific occasions. 

And then there’s the issue of scams, which run rampant across the internet. It’s hard to find a legitimate bot that isn’t out there just to get a hold of your funds—a reality that requires you to be extremely vigilant when finding a program to rely on. Listening to other traders’ opinions through cryptocurrency forums can help you make a decision, but you also need to do ample research to be 100% sure about which company you’ve chosen to trust. In general, it’s best to be wary about too-good-to-be-true offers, which claim to give you huge returns for using their bot—because there’s no guarantee you’ll make a profit, even with the help of an API. 

On that note, remember that crypto bots are not perfect. There’s no avoiding bad trades—at least not for now. It’s best to look into these programs in the long term and determine whether they’re worth using because it’s possible for them to not merit enough profit to your liking. Moreover, many legitimate bots aren’t programmed perfectly, which can cause bad trades to pop up more often than not. 

Finally, your connection has a huge influence on how a trade plays out. Because the market moves so quickly, a slight rise in ping can cause transactions to delay, which may result in buying or selling for a different price than the bot intended. This issue can result in huge losses—so beware. In general, there’s a lot of risk in using software, so ensure that you’re prepared for the drawbacks when they do bite back. 

Recap 

Crypto trading bots are wonderful programs to help you close ideal trades all day long so that you can shift your attention out of the cryptocurrency market and into more important things in life. However, as it stands, bots aren’t smart enough to execute all the trading decisions, so you need to tell it what to do under specific conditions, which will require thoughtful planning and consideration for a quickly changing market behavior. Moreover, there are inherent risks in relying on company-run software to handle your funds, so it’s important to be extremely vigilant when working with bots. Cryptocurrency bots can net you life-changing wins but also irreversible losses—so tread carefully. 

Leave a Reply

Fresh Content

Just add your email and hit subscribe to stay up to date.

REQUEST THE VIDEO

* indicates required