Imagine a market that runs 24/7 with thousands of assets (and new ones added daily), major exchanges around the world, and huge news events that move prices happening daily. Could you actively trade it without being afraid of missing a massive move while you take a nap or go out for a run? This is why a number of crypto traders use crypto trading bots (also known as crypto trading algorithms).
Defining a Crypto Trading Bot
Simply put, a crypto trading bot is an automated program created to trade cryptocurrencies based on certain set parameters. These parameters are usually called algorithms, hence the “algorithmic trading” or “algo crypto trading” moniker. A crypto trading algorithm could be as simple as trading between two currencies (e.g. Bitcoin and Ethereum) every time the price of one changes enough with respect to the other. But it could be much more advanced, finding arbitrage opportunities, taking advantage of sharp price movements, and more.
Basics of how Crypto Trading Bots Work
Crypto trading bots connect to crypto exchanges via API to place quick small orders based on the programmed algorithm thus algo trading crypto. They know when to place those orders by tracking crypto prices via the same oracles as the exchanges do. Being bots, their big advantage is that they can place orders at lightning-fast speeds that no human can match, thus taking advantage of favorable price situations before human traders can.
4 stages of Crypto Trading Bot’s Work Cycle
Bots generally work in 4-stage cycles that go in the following order so it can perform algorithm crypto trading properly: data analysis, signal generation, risk allocation, and execution.
Good trades are based on good data. Since a bot can process and analyze a lot more data a lot faster than a human can, bots get to use a multitude of data points to make every tiny algorithmic crypto trading decision. And that knowledge really is power.
The bots then run that data through market data and hundreds of technical indicators to see what strategies are viable and profitable. They try to predict what trades will create the biggest profit with the least risk for the programmed algorithmic trading crypto bots can do. In essence, this is the stage where the bots act most like a trader, identifying opportunities and planning the course of action.
Risk management is important in any strategy. Another advantage of using a bot is that it will faithfully follow any risk management parameters set for it and not be tempted to bend the rules “just once” for the perfect trade. In essence, this stage is about deciding how much capital to allocate to what trade.
The least tactical but most important stage is that of actually executing the trade by interacting directly with an exchange using the crypto trading algorithms the bot is based on. Obviously, if a trade is not placed correctly or timely (or runs into issues such as a gas spike), the entire strategy is at risk and the previous 3 stages would be in vain.
Simple Trading Strategies
Algorithmic trading in crypto follows algo trading in general. Naturally, there are nearly as many crypto algo trading strategies as there are regular crypto trading strategies. However, since bot trading is based on automation and the speed of execution, some strategies are more popular and relatively simple to program.
Crypto algorithm trading can simply follow the trend. Often, when a market begins to move in one direction, that movement continues for some time. This is known as momentum. The bots can use their vast data processing and analytical power to gauge whether the momentum still has room to grow or if it has reached its pinnacle. The bot can then buy into the trend and later sell out of it when the signals are there for the price trend to reverse.
A mean reversion strategy is the opposite of the momentum one though uses the same crypto algorithmic trading principles. The assumption is that any sudden or sustained price changes away from the price’s longer-term trend are exceptions that prove the rule. Thus, the price will return to the average long-term trend for that particular asset, i.e. revert to the mean. This is a great way to profit from market news that causes too much panic or optimism — just program the bot to trade opposite the price trend when its analysis says that the reaction to the news and the subsequent price change has gone too far and sell when it returns closer to where it was before the big news.
Crypto exchanges around the world are far from being perfectly in sync and so the price of a single asset can vary significantly between them. Quickly buying an asset on an exchange where it is cheaper and immediately reselling it on the one where it fetches a higher return. But such arbitrage opportunities can disappear in seconds, making it much more advantageous to use a bot that can trade fast and catch the arbitrage before it’s gone.
Speaking of news, Natural Language Processing (NLP) can be used to program a bot to recognize patterns on Twitter and elsewhere that show a sentiment for or against an asset (or the entire market even) and make trades in anticipation of when that sentiment manifests in an actual price trend. It’s one of those crypto trading bot strategies that are more focused on people rather than technical indicators.
Pros and Cons of Using Trading Bots
While using trading bots can be very advantageous, it is by no means a guarantee of success. Thus it’s important to review both the pros and the cons of using trading bots.
- Bots work 24/7 and much faster than humans, thus giving you many more opportunities to make profitable trades when you use algo trading for crypto (which also runs 24/7).
- Bots are much more effective at interacting with exchanges, including using advanced order types.
- Bots reward good programmers since you can program one to do all sorts of complex trading strategies.
- Bots don’t have emotions, which is actually very important since nearly all traders make mistakes based on emotions.
- Bots can be trained via simulators and learn much faster than humans do.
- Because of how they work, bots usually require fees for use, especially if you buy one instead of building it; you need to be sure the potential profit outweighs this necessary cost.
- Bots do require both trading and programming knowledge to create; mistakes can be costly.
- While the markets behave in certain patterns, they are ultimately as unpredictable as the humans who trade in them; a Black Swan event can wipe out a bot even more than a human.
Are bots profitable?
Yes, crypto bot trading strategies could be very profitable. Traditional finance has been dominated by algo bots for decades, with most of the trading on Wall Street long being done by algobots. Similarly, crypto trading bots could be very profitable depending on your strategy, how well you code the bot, how many others are running similar bots, and many other factors. Remember that no tool or strategy is perfect and will be profitable on every trade. Test different bots and strategies and make sure to diversify your strategies.
Build-a-bot and Running a Trading Bot
Ok, you’ve weighed all the pros and cons of running a trading bot and, in true DIY spirit, want to make a crypto trading bot yourself. But how? After all, writing a crypto trading bot is not an easy task. Since this bot would automatically spend your money and handle sensitive data, you need to be careful when building it even if you’re sure it’s the best crypto trading bot to create your own strategies. At the minimum, you need to consider each of the following steps:
- Connect top crypto exchanges to the bot (especially big ones like Binance and Coinbase).
- Choose between a technical charting, arbitrage, and other bot types.
- Select the appropriate algorithm.
- Code the bot with the chosen algorithm in mind
- Test it in simulations and on testnets until you’re confident that it works according to your intent and without any dangerous flaws or vulnerabilities.
- Making a crypto trading bot go live by deploying it and monitoring its real-life performance.
Buying a bot
If you want to profit from running a crypto trading bot but don’t have the programming skills nor time to learn how to make a trading bot for crypto, you can simply buy an existing one. There are bots for sale with each claiming to be the best. DYOR and be very careful to verify any bot with low buy-in trading and limited access to your data first. Here are some of the bots recommended on the Internet:
We talked about 3commas before. It’s a comprehensive platform that allows a number of automation strategies that you can buy and deploy. Having raised multimillion dollar funding rounds from major crypto investors including Alameida Research, 3commas is one of the biggest (if not the biggest) crypto trading bots on the market.
Coinrule is another bot service promising easy, no-coding-required algo trading by setting simple rules for what, when, and how to trade. It claims to be actively updating its database of market indicators to give the best data input for bot runners.
HAL basically promises as many strategies as its infamous namesake AI villain in 2001: A Space Odyssey had. The team behind HAL updates their strategies regularly so you could keep up with the market and maybe even get ahead of it.
Open Source Bots
Can’t program well and can’t afford to buy a bot either? Well, luckily for you, there are plenty of open-source crypto trading bots that are pretty easy (and free) to operate. These are bots like Pionex for beginners and Enigma Catalyst for advanced users (with plenty of in-between options).
Regardless of what bot you build, buy, or modify, remember that it is only a tool. Paired with the right strategy, plenty of caution, and the willingness to learn and adapt from your mistakes, crypto trading bots could indeed be a profitable strategy.