Billions of transactions, trillions of US dollars, and countless decisions — this is the world of crypto today. One of the key defining characteristics of cryptocurrencies is that they are volatile. Dramatic swings of prices happen across hundreds of exchanges and traders often struggle to make the right move to stay ahead of the market.
There are several reasons why a human trader simply cannot make money on the market reliably (in most cases):
- The nature of cryptocurrency trading is unpredictable;
- Thousands of transactions are conducted on various exchanges every minute;
- Assessing risks and potential profits is quite hard due to the overabundance of available information.
The unstable movement of prices should be enough to scare many traders off but the market is still quite competitive and full of participants. Why is that so? First of all, the Bitcoin hype train is still going strong and many people just don’t want to miss out on potential profits. Then, there is automation.
You have certainly heard about trading bots reading cryptocurrency news and many people know about automated trading taking place on Wall Street. However, the spectrum of potential applications for such bots is much wider in the context of crypto trading. How do crypto trading bots work and what is crypto automation in general?
Defining the terminology
Before jumping headfirst into the complexities of trading bots, we must learn about automation in finances in general. Since the volume of data that may or may not affect the price is growing due to globalization and the market reacts to the changes in behaviors of investors, making a correct prediction is often hard if not impossible.
Automated trading is a good response to the evolving nature of a constantly changing stock market. Computers are better at processing data and making correct assessments based on their analysis. They trade better, faster, and with more confidence than people. Now, imagine the complexity of the market doubles or triples.
Crypto bot trading strategies became prevalent specifically because there are so many sources of data. A good crypto trading algorithm collects information constantly and surveys dozens of platforms to find the best prices and catch the slightest changes in prices across the whole market. If you are not a dedicated trader spending all your time reading the news and assessing prices, you will never come close to what a good bot can achieve.
So what is a crypto trading bot? How can it be used to your advantage? Here’s a short yet concise answer to these questions.
How do trading bots work?
A bot is a piece of code. It is programmable and usually has a bunch of additional features. Typically, crypto bots gather and analyze large volumes of data to perform the following tasks:
- Analyze and refine the information received from various sources including exchanges, wallet operators, networks, and other platforms;
- Assess the interpreted data to make market decisions or provide valuable insight such as risk prediction or earning potential using certain assets;
- Execute a strategy based on the analyzed information or inputs from users who create their own special rules when to buy or sell crypto tokens and other assets.
Several types of bots are most popular in the trading community. Their popularity and extensive usage are a direct consequence of good results demonstrated by automated trading instruments in relation to the cryptocurrency market.
Here are some of the most frequently employed auto trading bots:
- Arbitrage bots are great for searching a price difference across multiple exchanges making decisions based on orders available on platforms at any given moment. Since the market is very volatile, it is one of the greatest instruments to offset potential losses.
- Trend trading uses mostly technical analysis methods to identify a good moment to sell or buy an asset. It is used for day trading as well as relatively long-term investments.
- Sell/buy bots connect with an exchange VIA an API key and conducts operations on your behalf. You need to specify conditions for purchasing and selling assets. The bot will respond to triggers and execute commands faster than any human.
Often, investors use a wide array of bots to create efficiently performing combinations that bring in respectable profits. On the other hand, some strategies involve only one type of automation.
The main takeaway
Some argue that using bots is a controversial technique. Others use them to their advantage. In many cases, automated trading still requires a human operator to be truly efficient. If you are interested in turning your cryptocurrency hobby into a reliable source of income, using bots is a must. At least some automation should be implemented in your trading routines to ensure that you make the right decisions.