What is a crypto trading bot?
Using artificial intelligence and programmed codes, crypto trading bots act as automated trading systems that execute trades with minimal errors and require almost no human intervention.
Because cryptocurrency trading occurs seven days a week around the clock, crypto trading bots have emerged as the de-facto tool for professional retail traders and institutional investors to track every move in the cryptocurrency market and profit from it.
A crypto trading bot is a software program that automates trading tasks, such as selecting, buying and selling a cryptocurrency based on specific parameters set by the bot’s programmer or creator.
Employing principles of artificial intelligence (AI) such as safety, objectivity and trust, crypto trading bots can be configured to execute different crypto trading strategies, such as buying into undervalued crypto tokens, adding new cryptocurrencies that have hit the market or even trading in a basket of cryptocurrencies to gain from price fluctuations.
Since crypto trading bots work per pre-defined rules and conditions, they keep investors from falling prey to emotions and offer a more efficient way of trading in volatile cryptocurrency markets.
Whether a crypto trading bot is configured to send trading signals or go the last mile and execute a trade, investors can benefit immensely from the logic-based approach and AI-powered automation on offer.
How does a crypto trading bot work?
Developed using programming scripts like Python, Java, C , or C#, crypto trading bots employ APIs to interact with different crypto exchanges and execute trades on them.
Crypto trading bots need to churn data from exchanges, generate trading signals from them, calculate the risk involved and then execute a trade. This applies to buy or sell trades and is repeated for every instance where a crypto trading bot interacts with a crypto exchange.
Using Application Programming Interface (API) keys to access the trader’s account, a crypto trading bot first analyzes the data using machine learning algorithms and identifies potential trades meeting its pre-set criteria.
Subsequently, it allocates capital in proportion to the risk defined by the trader and executes trades by sending buy or sell orders to the crypto exchange using its API. The length of code employed in a crypto trading bot varies depending on the number of trading strategies that it can deploy. At the same time, the programming language used is based on the comfort level of the bot creator.
That said, most advanced crypto trading bots currently in use rely on Python, primarily because it is well-suited to creating software for algorithmic trading and has advanced libraries of which developers can make use.
How successful are crypto trading bots?
Whether paid or free, crypto trading bots should be selected based on data regarding historical performance, the credibility of the bot’s creator and the reviews of peers who have used it before.
It is a known fact that most of the trading activity on Wall Street is dominated by algorithmic trading, which has been accelerating over the past decade. The same is now reflected in the cryptocurrency markets as institutional investors’ trading activity continues to gain momentum and far exceeds the trading volume contributed by retail investors.
As a result, the usage of trading bots is on the rise. An increasing number of private investors are utilizing one or more AI crypto trading bots to improve their chances of making consistent profits in the cryptocurrency markets.
However, while there are many free and paid crypto trading bots available, it is important to understand how these bots perform the tasks their advocates promise. For a crypto trading bot to deliver positive returns on a net basis, it must execute trades with lightning-fast speeds and have zero or negligible errors in its code.
Risk diversification strategies are used to decide the consistency of profits as even a single un-hedged trade could jeopardize days and weeks’ worth of trading profits. On the trader’s part, it is, therefore, essential to run multiple trading bots and choose only those that have a proven track record of producing substantial returns.
Are crypto trading bots legal and safe?
While crypto trading bots are legal and widely used by institutional investors, many fake or poorly coded bots are being sold to unassuming investors by anonymous bot creators.
Despite many reservations regarding the legal status of crypto trading bots, the fact remains that these bots are used worldwide and are considered to be legal. The extent of automated trading in traditional financial markets has been growing, and there is no reason to believe that cryptocurrency markets will fare any differently.
However, being legal is not the same as being safe. This is especially true for traders accustomed to trading in large volumes in the hope of eking out sizable profits from marginal price changes in the underlying cryptocurrency.
While a crypto trading bot will undoubtedly help execute large trades in a matter of a few milliseconds, the potential for raking up huge losses is very high if the trading strategy is not sufficiently back-tested. A critical component of developing a successful trading system, backtesting involves recreating outcomes using historical data and the resulting statistics to gauge the success of the trading strategy.
Additionally, cryptocurrency markets do not function based on technical analysis alone, requiring traders to be mindful of fundamental changes or updates to the underlying protocol of a particular cryptocurrency. This is impossible with crypto trading bots, as they rely on mathematical calculations based on pricing behaviors to spot and execute trades. Thus, it is essential that traders use crypto trading bots with fundamentally sound cryptocurrencies and perfect their trading strategies to generate consistent profits.
How much does a crypto trading bot cost, and are they worth it?
While most popular crypto trading bots are offered for free, they do come with associated costs, such as trading commissions and withdrawal fees, that need to be evaluated before proceeding.
When choosing a crypto trading bot, investors need to weigh the pros and cons of “free” crypto trading bots compared to those that charge a flat monthly or annual subscription fee. Most popular crypto trading bots like Naga, Pionex, eToroX do not charge users for viewing but have trading commissions starting from as low as 0.05% for every trade executed via their platform.
This is especially pertinent for those whose daily trading volumes regularly exceed tens of thousands of dollars. The trading fees due over a month could be far more than the subscription fee charged by other competitors.
For example, cloud-based trading bots like CoinRule and CryptoHopper provide a free trial, after which users can be charged from as low as /month to as high as 0/month, depending on the plan and range of services selected. These trading bots make more sense for investors with high trading volumes and who want to enjoy these services from anywhere in the world.
That said, investors or traders looking to purchase or rent a crypto trading bot need to verify if their crypto exchange supports bots. For example, CoinBase does not allow trading bots to interact with its platform, providing that utility with its CoinBase Pro platform.
However, with Coinbase announcing that the CoinBase Pro platform will cease to exist by the end of 2022, all advanced trading features, including the use of trading bots, will be available to all its users by the start of 2023. Exchanges like Binance, on the other hand, support a range of crypto trading bots and are much more suited for those looking to indulge in the high-speed trading powered by these bots.