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                                        Extreme Volatility of Crypto Markets Welcomes Trading Bots

Extreme Volatility of Crypto Markets Welcomes Trading Bots

01 Nov 2021

Bitcoin and cryptocurrencies at large are an extremely volatile asset class. This is seen in the significant fluctuations recorded in the prices of these assets due to numerous reasons. This volatility is a double-edged sword for investors. It may offer astronomic gains if timed right, but also cause massive losses if treated carelessly.

With this problem in view, several industry stakeholders have invested effort to simplify the trading process, remove the stress factor, and ensure that traders can make the most of the numerous opportunities available in the crypto-verse.

Crypto Market Volatility

Bitcoin currency, the foremost cryptocurrency, traded at around $20,000 in December 2020. A month later, it rallied to $40,000, and by April had reached an all-time high of $65,000. Barely a month after, the price of Bitcoin plummeted to $30,000, where it ranged until July when it surpassed $45,000. More recently, BTC continued to climb steadily, even smashing the previous all-time high recorded in April. A few days after setting a new all-time high record of $66,000, prices fell sharply once again to around $63,000.This is a classic example of how volatile the cryptocurrency market can be.

The Bitcoin price chart over the past year shows the price volatility. Source: Tradingview

Volatility plays a significant part in any market. In traditional finance, it is defined as the degree to which the price of an asset fluctuates over time. In a 24-hour trade, it is described as the price differences of an asset from its starting price. Examples of volatile assets include cryptocurrencies, forex, stocks, and derivatives. Examples of non-volatile assets: bonds, promissory notes, gold, etc.

The volatile nature of the crypto market is mostly determined by the following factors:

  • Being Digital    

Most cryptocurrencies are digital assets with no physical commodity or currency underpinning them, usually without a centralized entity in control, unlike fiat. This means that the price of these assets is governed purely by demand and supply, which are subject to increased volatility without a stabilizing factor.

  • Evolving technology    

Blockchain, the underlying technology on which the digital assets are deployed, is still relatively new. In just over a decade of its existence, it has evolved in many ways, but it still has issues with scalability, and this affects the time frame of confirming transactions and can cause prices to nose dive at a moment’s notice.

  • Speculative nature    

Speculation is what drives the crypto market. To turn a profit, investors usually bet on whether prices would rise or fall. These speculative bets result in either a quick influx of money or a sudden outflow, resulting in significant volatility.     

  • New and emerging market    

Even today, after more than a decade since the moment Bitcoin was introduced, the crypto market is still considered to be in the early stage of its development. While it is garnering increasing media attention, the market size is still tiny compared to gold or traditional finance. This means that the smallest of factors – such as a group of people holding large quantities of digital assets – can impact the market.

Chart showing the volatility of Bitcoin prices compared with gold price and S&P 500 price. Source: Tradingview

  • Investor type    

Any investor can trade the crypto market without any specialized skill or regulatory permission, unlike the real estate sector or the stock market. These small-time investors’ frequent entry and exit and the increasing number of institutional investors finding crypto attractive for short-time speculations increases the volatility of the crypto market even more.

Despite these factors, traders can still have the edge over the volatility of the crypto market through trading software and products designed by industry stakeholders to beat the market.

Automated Crypto Trading: What It Is, Why Users Need It

As highlighted already, investors find it challenging to keep pace with the crypto market because of its volatile nature. This has resulted in the development of automated trading products. AI-enhanced trading services are designed to give traders an edge over the market and increase their chance of receiving a good return on their investment despite the prevailing market conditions.

Automated trading bots are designed to monitor and analyze market conditions and execute trades efficiently without any human involvement. The growing adoption of crypto has also seen a proportional increase in the number of automated trading bots available on the market, including several proprietary grid trading solutions developed by major crypto exchanges.

Trading bots can carry out several actions, which enables them to be ideal for trading cryptocurrencies and generating stable income over time. They can analyze market data, test varying indicators, deploy diverse strategies depending on the prevailing market situation, all in an instant.

There are two trading bots setups mainly used from profiting from the automated trading on the crypto market:

  • Market-maker bots take advantage of the spread between the ask and bid price of a token to turn a profit for its user. It accomplishes this by providing constant buy and sell prices on a wide range of spot digital currencies and digital currency derivatives contracts as the prices move. Although very lucrative investors, these bots have a caveat; low liquidity on exchanges would make them unprofitable.     

  • Arbitrage bots profit from price differences of a digital asset across several exchanges. These bots can profit by buying the asset on one exchange at a lower price and selling for profits on another. For investors who want to incorporate futures contracts into their trading strategy, these bots can take advantage of any disparities between a futures contract and its underlying asset.    

This type of bot, however, has several flaws. The first one requires investors to split their portfolios between several exchanges, while the second lies in the increasing adoption: the crypto market gets global which reduces the price gap between different exchanges and makes arbitrage bots less effective.

Most crypto traders are not adequately incentivized to keep hold of their assets when the prices take a tumble. Since gains are made during price rallies, automated trading bots can help engage with the marketplace even when they cannot do so in person.

Advantages Of Using Trading Bots

Advantages Of Using Trading Bots

The use of cryptocurrency trading bots offers numerous advantages to crypto investors. They are capable of making the trading experience which can be convenient, easy and straightforward.

  • Processing speed. Trading bots can analyze a high volume of market data instantly before executing a trade, and this speed ensures their ability not to miss even the slightest price fluctuations, ensuring precise execution of each trade.     
  • Reduced risk of human error. The risk of human errors when executing trades using algorithmic trading is virtually non-existent. Right after choosing a preferred trading pattern for a crypto bot, users may sitback and watch their investments generate profit with every price swing.     
  • Emotion-free trading. Emotion is another aspect in which trading bots offer an advantage. Bots remove the emotions traders most times have when trading. These emotions; fear, and greed, are usually hazardous to traders and their positions, sometimes making them make poor decisions that lead to suboptimal outputs. In the case of trading bots, they can remain calm and obey the pre-set parameters.    
  • Variety of trading strategies. Another advantage of Trading bots is that a large variety is available for traders of all categories. More experienced traders would find options that they can fine-tune to follow the strategies available. New traders will also discover backtested bots or those made to mimic the trading strategies of experienced traders available to choose from.    

Disadvantages of trading bots

Despite their apparent pros, trading bots also have some disadvantages all investors should consider before engaging in automated trading.

First, no AI bitcoin bot is fail-proofTrading cryptocurrencies, whether manual or automated, requires some market research and backtesting of the strategies employed to increase their effectiveness.

Second, not all bots are equally profitable. Some may offer free plans, have great visuals, a wide range of features offered, but all these features will pale compared to programming flaws or poor hardware. These factors can severely limit the efficiency of a trading bot. That is why it is extremely important to test several platforms before making a final decision.

Third, bots’ profit calculations may be tricky. Some platforms do not take into account exchanges’ commissions which is extremely important to consider if you use very tight grid steps of 0.3% or less.

Trading bots gain increasing momentum in trading digital assets. Combined with human oversight, they can be an invaluable tool for quickly and efficiently exploiting market opportunities and maximizing profits.


Trisha Reynolds

Written by Trisha Reynolds
on 01 Nov 2021

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