Since Bitcoin took the world by storm, we had many stories of unimaginable success and fortune-making. Overnight billionaires and millionaires were the hottest topics for news media. However, the craze calmed down eventually. Many started considering Bitcoin a good investment opportunity. Even conservative investors decided to jump on the hype train. Today, the question of using crypto for passive income is not a hypothetical one.
There are several ways to slowly build wealth by investing in cryptocurrencies.
Holding on to your assets for dear life
The oldest motto among crypto enthusiasts is “hodl”. The term is a result of a spelling error that became the main slogan of the whole blockchain movement. It means to buy a bitcoin and hold it until it appreciates regardless of what is currently happening to the financial instrument. These investors are waiting for BTC to hit $100K and even more.
While not the most viable strategy, it is a method that led many to success. Holding is good for those who believe in the long-term prospects of cryptocurrencies. It may take years or decades until these coins and tokens become accepted by all developed nations. Until then, you should look at other options as well.
While we are on the topic of holding, we should discuss DCA or distributed-cost average which is a strategy of reducing the average price of an asset by purchasing in small portions over time. Using this method, one can accumulate a sizeable portfolio with different coins by simply buying some BTC or ETH every week or so. This way, your disposable income can be turned into profitable investments and even a passive income stream if the stars align just right.
Staking your coins
Some of the best passive income crypto projects are those where you can stake your tokens to generate income. Many are short-lived and work more like Ponzi schemes rather than actual investments. However, some operate with a sound economic model and can be quite useful. We do not want to endorse any of them, but after some research, you can easily identify good, trustworthy projects that allow users to invest by staking their assets.
Yield farming is another form of staking. The idea is that you provide liquidity to ensure that the ecosystem remains stable and can support a large volume of trades. In exchange, the project rewards those who lock their assets in place with additional tokens. Some companies issue special reward tokens that are distributed among liquidity providers.
Staking is great if you are planning to invest in a promising startup and can wait for a relatively long period. Many projects require users to lock their funds for up to 6 months. While generated rewards outpace bank deposits, they are often insufficient to counterbalance potential risks. Some notable crypto passive income projects are Tether (USDT), Ethereum 2.0, USD Coin (USDC), and Polkadot (DOT).
Some companies failed spectacularly by promising impossible returns and creating circumstances for potential market manipulations. A perfect example is LUNA, a stablecoin that managed to lose all its value within a weekend after entering the list of TOP 10 most valuable cryptocurrencies. It is far from being a good type of passive income from crypto in 2022. However, it was once considered the most reliable investment option.
Using bots is the most promising method
While it is possible to reliably form passive income in crypto by staking, the crown in this domain is worn by the automation industry that offers the best form of creating passive income bots for trading. Different types of bots can earn money reliably if you dedicate enough time to researching the best strategy based on technical analysis.
First, let’s talk about the most commonly used bots.
- DCA bots are automated scripts that purchase assets according to a predetermined scheme. By purchasing only portions of assets over certain periods, you reduce the average price and make your overall portfolio more efficient. It is the best way to slowly accumulate a diverse portfolio of different digital assets without spending too much money on it.
- Copy-trading bot is an algorithm that follows successful traders and copies their orders. The delay is close to non-existent. If you have found a very good trader whose decisions are usually solid and reliable, you can make a bot that repeats everything that the trader does without any pauses creating a perfect copy of a successful investor.
- GRID bot is an algorithm that works similarly to DCA but has different take-profit orders to ensure even more efficient trading. You don’t even need to tune them. Just go to WunderTrading, sign up for a free plan, and start your first GRID bot without worrying about settings and other complicated stuff. The system is quite good but does not work 100% of the time.
- Arbitrage bots are specialized algorithms that work with multiple exchanges simultaneously and seek discrepancies between prices of assets on different platforms to capitalize on the minute changes. By instantly placing two opposite orders on two platforms, it creates a small margin that you pocket in. While not the most profitable strategy, due to price convergence, it is still a good way to create passive income with cryptocurrency.
Are trading bots profitable?
The issue of profitability is the first one to come up when a discussion starts about bots in trading. The sad thing is that it depends on so many factors that determine whether scripts are useful often meets a dead end. Personal preferences and unique market circumstances create wildly different results. Some investors believe that bots generate the best passive income with cryptocurrency pairs while others experience significant losses.
The process with which most scripts operate can be described as follows:
- An investor uses TradingView or a similar service to find a reliable strategy. Technical analysis is employed to identify a good combination of indicators that can form predictions with a decent enough success rate. Indicators can send out inputs for bots.
- A script is written in such a way that a bot receives said inputs from indicators and acts as instructed. For example, if there is an RSI indicator and you set your bot to shorten an asset when the numerical RSi value reaches more than 65, the bot will place an order the moment it receives a corresponding signal from TradingView.
- An order is placed with an exchange that you chose. Different platforms are connected with different exchanges. WunderTrading works with Binance, Coinbase, OKX, Bitpanda, BITTREX, KuCoin, and many others. These exchanges receive orders via API and immediately execute them.
The whole process takes fractions of a second. From a human’s perspective, they occur simultaneously. However, bots can compete against each other meaning that there is a distinct disparity between services. Some providers have more robust infrastructures and smaller chances of failure during each step of the procedure.
While most operations are conducted independently from users, the determination of correct inputs is the most important part and it must be done by investors. There are various technical indicators and their forecasts may vary. Since it is your duty to choose them, outcomes often depend on the validity and soundness of your choices.
Profitability is the result of many factors, but bots themselves play a minuscule role in whether your endeavours succeed. If everything still falls on your shoulders, are crypto trading bots profitable? Well, yes. Humans are still less efficient at trading.
Passive income with crypto bots
Robots have many advantages over humans. Some of them are best explained in science fiction. While some of the reasoning found in the literature may seem irrelevant, the truth is that humans have weaknesses that machines simply lack. Our physiological limits often prevent us from achieving great results in many areas, but when it comes to crypto trading, these limitations become apparent.
Why are machines better at making money?
- Crypto markets are open 24/7. Even when you sleep, opportune moments occur. You may miss out on many chances to make a profit while giving your brain some time off. Robots do not need sleep and stay active 99.9% of the time. Some seconds of inactivity may be caused by cloud services that run the architecture behind bots. Otherwise, they remain active around the clock.
- Humans make mistakes under pressure. We may take too long to analyze a simple market situation or forget to set up a stop loss. Emotional anxiety mounts when you are trying to make life-changing decisions. Such difficulties are common for people, but foreign to a cold-hearted machine that never falls victim to overthinking or second-guessing.
- Regardless of how fast you think, there are notable delays between receiving information and acting on it. The length of delays increases when you are tired or hungry. Performance issues can be caused by a variety of factors. However, the reaction is something that many humans lack, especially compared to robots that make decisions and place orders instantly.
- We cannot process large volumes of data efficiently. Indicators display tons of data. It may appear simplified, but our brains still take time to analyze inputs one by one. Comprehensive thinking is a unique trait of humans, but we still need time to process data. Robots may have a very specialized, narrow frame of intelligence, but their computational speed is unmatched by biological organisms.
We are far away from the moment when AI tries to wipe us off the face of Earth. However, we are already losing in many aspects. Many huge corporations and financial institutions have been using computers for analytical purposes and automated order placement for years. Only recently, the technology became widely available and, more importantly, affordable to wider audiences of investors.
How to make money botting?
There are three key components in any strategy that involves automation:
- A signaling platform. Most services work with TradingView, a powerful charting platform that has a rich variety of technical indicators. A basic plan here costs a couple of bucks per month and allows you to integrate its functionality with any third-party platform.
- A botting service. Companies like WunderTrading offer a good selection of automation options that can be connected to different exchanges and terminals. You can try it out for free with a 7-day trial period or by using free bots.
- An exchange. You must have an active account with enough funds for orders on at least one exchange (two, if you want to use arbitrage). There are many interesting options like Binance, Coinbase Pro, and OKX.
Now, let’s talk about how to earn passive income with cryptocurrency automated trading. After choosing reliable services, you should think carefully about money management. The cost of investment goes up, as you add more and more services to the strategy. While $10 or $15 may seem like not much in the grand scheme of things, these small payments add up quickly. Fees and charges should also be taken into consideration.
The final result can be heavily skewed by prices of services, commissions for transactions, trading fees, and other factors. When you are aiming at creating a steady income stream that works even when unattended, these small payments must be analyzed and calculated. Remember that bots cannot make investment decisions for you and will work within defined borders. There is a ceiling to how much a bot can earn using your instructions.
What are bots good for?
While automation can be used for any type of trading, scalping and day-trading seem to be the most reasonable directions for automation. You can make sound investment decisions with enough time for thorough analysis and contemplation. Even a couple of hours is often enough to come up with a solid plan and carefully make preparations. You won’t be pressured too hard to make a decision and reaction is irrelevant on such long frames.
When it comes to trading on shorter frames like 5-minutes or 15-minutes, bots often perform better and faster. Two trading patterns fall under this category:
- Scalping is a way of building capital by making many trades taking as much profit as possible while cutting risks with well-placed stop loss orders. Since you don’t need to earn more than a couple of price points per trade, you often work with very short time frames to find more opportunities to enter the market.
- Day trading is a style where most orders are closed within a day. While the term is more accurate when it describes traditional financial markets, since they work only during business hours, the principle of placing orders that must be closed within several hours still works for crypto markets. Despite giving you more time to think about every action, it is a better domain for machines that can act on signals of technical indicators without overthinking them.
These styles are the most appropriate fits for automation. The speed with which a trader must react to market changes is unreachable for many humans when it comes to scalping. At the same time, reliability and consistency required for intraday trading is also something that only machines can achieve.
Should you try automation?
Many believe that automation is a good way for beginners to get accustomed to crypto trading in general. You need to learn some technical analysis before you can set up a well-performing bot, but most strategies are relatively easy and can be used by novices without any issues. For example, RSI (relative strength index) or Stochastic are two commonly used indicators that can be used effectively despite having only one numerical value to track.
At the same time, there are some caveats that many novice traders do not account for when dealing with automation. A bot may cost only a couple of bucks per month to run, but when combined with the price of TradingView and fees on an exchange, the result may leave you in the red.
Nevertheless, you should try it. There are many free bots and lots of companies offer trial periods to attract new customers. You can exploit such promotions and try a scalping strategy without risking large sums of money before committing to a monthly or yearly subscription.
Rules for good passive income
Here are a couple of very obvious yet important rules to remember whenever you want to create a passive income stream:
- Never use all your money or put your livelihood at risk. Use only disposable income to invest and never place deals that would put your whole portfolio in danger. A good rule to have is to always set stop loss orders that protect you from big losses and use about 5% of your portfolio for a single trade.
- Reinvest all passive income to ensure that you are building toward something bigger. While withdrawing some small amounts to reward yourself for patience is not a big deal, taking out all profits is wasting time. You can create a much larger passive income stream if you reinvest all earnings.
- Never panic. Changing your strategy from time to time can be beneficial, but frantically switching between methods within a week is not helpful. The market is a naturally volatile environment. You have to test trading strategies over long periods.
Modern crypto trading bots can be very efficient. Scalping and intraday trading are especially good areas for automation. When you employ a good strategy with technical analysis and smart money management, bots can reliably bring in profits creating a respectable passive income channel. However, you should be considerate of potential difficulties and challenges.