Trading in a highly competitive environment requires a lot of focus, time and attention. It is crucial to put your emotions aside during large swings to build repeatable strategies. These tasks can be complex even for experienced traders. In the stock market, this problem was solved through algorithmic trading. Crypto now has a similar concept in the form of crypto trading bots. So how does this work?
What are Crypto Trading Bots?
Crypto trading is a blazing-fast world. To make the best trades, you must be able to execute trades exactly when the requirements are met, while also calculating your returns in real-time. This is a lot to manage at the same time.
Crypto trading bots have been introduced to solve this problem. They are automated trading systems that execute trades when your conditions are met. They have easy access to up-to-date information and operate efficiently.
How Do Crypto Trading Bots Work?
Trading bots are programmed and created by developers in languages like Python, Java , C or C++. They also utilise application programming interfaces (APIs) of crypto exchanges to execute trades automatically.
The bots first go through and process trading data available on the exchange. From this, they calculate the possible risk and return of investing in specific assets. This helps them determine the optimal trading strategy, which is adapted based on your criteria.
Read more: Crypto Trading Strategies
Many trading bots today use Python because of the abundance of libraries and resources available. It is widely used for both algorithmic trading and machine learning, both of which are important for the automatic execution of trades.
Types of Crypto Trading Bots and Their Features
There are many types of crypto trading bots. While algorithmic strategies can be written based on one’s preference, we have listed a few widely used bot strategies here for reference
Scalping: These bots place many orders in a short amount of time to take advantages of small market movements.
Trend following bot: These bots follow a market trend and place orders accordingly.
Arbitrage bot: These bots take into consideration the price differences between exchanges. The bot purchases an asset at a lesser price on one exchange and sells it on another exchange where the asset is trading at a higher price.
Coin lending bots: They lend your crypto to other users on Defi platforms on a high interest rate. The bots scan the best opportunities across different platforms.
Market-making bot: These bots place a buy and sell order simultaneously. They take advantage of the buy-sell spread on the market.
How to Choose the Right Crypto Trading Bot for Your Trading Strategy
When choosing a crypto trading bot, it’s important to consider factors such as the bot’s trading strategy, level of customization, and track record of performance. Additionally, it’s important to ensure that the bot is compatible with the exchanges that you plan to use and that it has a user-friendly interface. It’s also a good idea to read reviews and ask for recommendations from other traders. Finally, it is always recommended to test the bot with a small amount of capital before using it with a large amount of money.
How To Create a Crypto Trading Bot?
How to Make Your Own Crypto Trading Bot?
Creating a trading bot from scratch is not a trivial task. You must have some programming abilities and you must familiarise yourself with the APIs of various trading platforms. Then you define its parameters and how it determines the risk and reward of various trades. Finally, you must be able to test this in a safe environment without incurring a lot of expense.
Alternatively, you can purchase trading bots from various service providers like Coinrule and Cryptohopper. They are much more intuitive for users without programming experience. You typically pay a monthly fee for access to various tiers of the service, each with its own features.
Crypto Bot Trading: Advantages and Disadvantages
|Trading bots eliminate human error||Exposed to programming flaws|
|They are automated||Some trades which the bot takes on your behalf can be righly risky|
|They can trade 24*7|
- Human Error – Crypto trading bots eliminate the possibility of human error in their executed trades. Thus, there is no need to worry about manually executing trades at the perfect time. We as traders also let our emotions and loss aversion affect our trades. Bots can help alleviate this concern.
- Automated – Trading bots give you the time to focus on other aspects of your portfolio. Since you do not have to spend hours manually trading and calculating your returns, you can focus on your trading strategies instead.
- Operation Time – Bots can trade 24/7. This is never going to be possible for human traders. Therefore, bots allow you to earn even while you sleep.
- Vulnerabilities – If the bot has a flaw in its programming, this can lead to erroneous trades and affect your earnings severely. Before you decide to use a particular trading bot service, be sure to do your research and ensure there are no vulnerabilities in the code.
- Risk – Some bot providers can promise you will earn high returns with ease. However, this may be done using very risky trading strategies. Therefore, you must be careful about the strategies you choose.
Read more: What Is Dollar Cost Averaging In Crypto
Security Measures for Crypto Trading Bots and How to avoid Scams
While using a crypto trading bot, it is important to consider the following security measures.
- Two-factor authentication: This adds an extra layer of security by requiring a second form of verification, such as a code sent to your phone, in addition to your password.
- Secure connectivity: Make sure that the bot’s connection to the exchange is secure and that all data transmitted is encrypted.
- API key security: When connecting a bot to an exchange, you will typically use API keys. Make sure to keep these keys safe and never share them with anyone.
- Regularly update the bot: Make sure to keep the bot updated with the latest security patches and software updates.
- Use a VPN: Use a virtual private network (VPN) to add an extra layer of security and protect your IP address from being tracked.
- Keep a backup: Keep a backup of the bot’s settings and configuration, so you can quickly restore it in case of a problem.
While no program is completely immune to threats, regular checks and balances will help one to securely use trading bots thereby avoiding any scams.
Crypto Trading Bots: The Future
The future of crypto seems to be full of trading bots. Some estimates of the stock market indicate that over 80% of the trades in the market are conducted by algorithmic traders. As the crypto market grows and attracts more investors, the quality of trading bots improve.
One area where crypto bots are rapidly expanding is the derivatives market. In recent years, the crypto derivatives market has taken off. Given the speed and volatility of this market, AI crypto trading bots are very popular tools. As this expands further, many new trading strategies will also emerge.
Read more: What are Crypto Derivatives
Crypto bots automatically shift your funds from one liquidity pool to another in DeFi protocols. This is another area of future expansion as the market matures.
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FAQs on Crypto Trading Bots
Is Crypto Bot Profitable?
Crypto bot trading can be very profitable if done right. However, most services on the market fail to provide significant returns after transaction fees and their own monthly fees. It is important to choose the right service provider or create your own for success.
Are Crypto Trading Bots Risky?
Trading bots have their own sets of risks as shown above. If the code has flaws, your capital is also at risk of being lost in bad trades. Additionally, they may use complex trading strategies that lose you more money than they make. However, they also remove many other types of risks from your trading activity.
How Much Does a Crypto Bot Cost?
Some tiers of trading bots can be offered for free, but with limited functionality. Meanwhile, the most expensive ones can cost you hundreds of dollars each year, with payments of $70 or more per month.
Are Crypto Trading Bots Legal?
Crypto bots are completely legal to use. Many exchanges actively provide developers with the tools to create better bots. There is also no regulation around their use. They are thus popular options for institutional investors.