A crypto trading bot is an automated program used to trade digital assets on cryptocurrency exchanges.
For example, a crypto trading bot could be programmed to buy Bitcoin when the price rises by more than 10% in 24 hours and sell it when it falls by more than 10%. The algorithm behind this process takes into account market volume and volatility as well as recent price movements to determine whether or not it should make a trade given specific parameters.
If you want to take advantage of the opportunities presented by market fluctuations without having to constantly monitor your trades yourself, then using a crypto trading bot may be worthwhile for you.
Why People Use Crypto Trading Bots
Investors use trading bots for various reasons. Some use them to automate their trading, allowing the bot to make decisions on buying and selling your cryptocurrencies, which is referred to as ‘fully automated’ trading. Others prefer to use a manual strategy that involves setting up a specific set of rules for when trades should be made and then letting the bot execute those orders based on those rules.
In other words, you tell the bot what to do when certain conditions are met (like ‘buy 10 XRP when it drops below USD$1’), but not how much or at what price you want to buy those coins.
Finally, some traders only rely on bots for backtesting strategies. They develop strategies using historical data sets and then test them out on historical markets to determine if they’ll work in real-time. It also allows them to check if the strategies will yield enough profits, given the fees charged by exchanges like Binance or Kraken.
How Crypto Trading Bots Work
There are three types of crypto trading bots: high-frequency, market-making, and arbitrage bots.
A crypto trading bot generally works by analyzing the market and making decisions based on that analysis. A bot may be programmed to invest a set amount of money in small increments into a specific cryptocurrency over a period of time, also known as Dollar Cost Averaging (DCA). Another strategy is buying or selling a particular cryptocurrency at a certain price. The bot will then execute this strategy repeatedly until it’s instructed to do something else or until there’s no profit left in its current strategy.
There are two main strategies behind crypto trading bots: high-frequency trading (HFT) and arbitrage opportunities. HFT involves placing large amounts of orders on exchanges as quickly as possible to profit from short-term price movements. An example would be buying low on one exchange and selling high on another exchange within seconds of each other.
Arbitrage opportunities occur when prices between exchanges differ significantly enough for traders using HFT strategies to buy coins cheaply on one exchange while simultaneously selling those same coins at higher prices elsewhere.
How To Choose A Crypto Trading Bot
The first thing to consider when choosing a bot is the number of exchanges that it supports. The more exchanges your bot trades on, the more coins you can trade with. Some bots can trade across major exchanges, such as Binance, GDAX, and Kraken. Others only offer support for one or two exchanges. This could be a deal-breaker for some people who want access to a wide range of coins.
Some bots are more suited for specific markets, like how Bitsgap is robust in a market that isn’t too volatile because it relies on grid trading. The strategy feeds on a market’s inactivity and makes several trades in a day as crypto prices make small movements to yield a profit.
You’d also want to look at a bot’s security features such as two-factor authentication (2FA), cold storage wallets, and application programming interface (API) integrations with exchanges. Other features that you need to examine are its customer support options and ease of use.
Finally, the cost is always a significant consideration. This is especially true if you’re using leverage to buy cryptocurrency assets like Bitcoin Cash (BCH) with borrowed funds via margin trading. This means paying interest on those loans until they’ve been repaid by profits made from trading cryptocurrencies.
Tips On Using Crypto Trading Bots
Here are some important reminders when using cryptocurrency trading bots.
It’s wise to take it slow and make sure you understand the bot before investing a considerable amount of money.
Research the bot before you start using it. Find out how well it performed in previous market conditions and if there have been any issues with its operation in the past.
Attend To Your Bot
Don’t leave your bot unattended for a long time. You could lose all your money if someone hacks into your account. Keep an eye on what’s going on throughout the day or whenever possible.
Any financial tool or service that promises returns above traditional investments typically involves higher risks. Therefore, it’s critical to research the strategies employed by crypto trading bots and the reputation of its developer in the industry and within cryptocurrency circles. A better understanding of the cryptocurrency markets is also essential for the optimal utilization of a crypto trading bot.
Also Read: What Are NFTs And What Are They For?