What Is a Bitcoin Trading Bot and How Does One Work?



To answer the question of how crypto trading bots work, we have to talk about crypto trading in general. What is bot trading? Learn more from us!

One of the key issues that many traders face is fatigue. While market volatility and uncertainty can be financially devastating, a smart trader can navigate even the worst situations without losing too much. However, it is important to remain sharp, constantly read cryptocurrency news, and make all operations as quickly as possible.

Is it possible to maintain a very demanding schedule and avoid most of the troubles? Yes, but only for a brief period. At some point, your body will simply give up. Here is the moment where trading bots come into play just like we dreamed about robots tirelessly working while we rest. 

What is a Bitcoin trading bot? To put it simply, a bot is a computer program that executes buy and sell orders based on the inputs of the operator. The inputs can be generated by a human or by an algorithm. The main goal of using them is to get rid of downsides that any human trader has:

  • Slower reaction time due to limited capacity of the human brain to both process information and act quickly enough;
  • Emotionality is the worst enemy of any trader since making important financial decisions while stressed is the surest way to financial demise;
  • Physiological limitations of a human body that simply cannot stay cognitively active for long periods let alone around the clock. 

Computers do not have such weaknesses and, in theory, should be much more effective at making profits by trading financial assets. Now, what is bot trading? It is an investment or trading strategy involving heavy usage of various automation instruments such as grid, arbitrage, trend trading, and other bots.

How crypto trading bots work

A bot is a program that connects to exchanges VIA an API key and can act on behalf of its human “master”. The program is triggered by conditions that are defined by either an educated human or an algorithm that analyzes massive volumes of data to generate potentially profitable commands for a bot.

When it comes to human inputs, the whole process is relatively simple:

  • A trader sets rules for selling or buying an asset;
  • The bot monitors the market and executes orders according to the rules;
  • The program follows the rules without hesitation until it is stopped.

In this case, a trader must be well-informed about the complexities of financial markets in general and the situation in the cryptocurrency market in particular. The best crypto trading strategy is to use bots after careful consideration and some trial and error using smaller orders. Some companies offer back-testing: using your bot settings on the history of the price chart to analyze its potential effectiveness.

Using advanced algorithms

Stock trading is very different from crypto. What is a bot trading crypto and why is it so important to use? The answer is information. There is an ocean of data out there with rivers connected to exchanges, news sites, wallets, and other sources filling it constantly. Humans drown in such pools of information. It becomes incomprehensible to them.

Computers do not have this weakness and can quickly analyze the information, categorize it, assess the risks (based on given inputs), and make decisions way faster than the best trader could.

There are various types of bots analyzing market data. For example, an arbitrage bot gathers prices and info about available orders from multiple exchanges to find minute differences and create opposing buy/sell orders to make marginal profits.

What is a crypto trading bot for an investor?

If you want to invest safely, bots won’t be your first choice. They are designed to maximize potential gains during volatile periods in the market. They outperform human traders by making decisions faster and without a moment of doubt. However, they may not outperform a single reliable asset that brings a small yet very consistent profit.

The performance of any given bot is still reliant on the mastery of a trader. If you are an informed, well-educated investor more than just acquainted with trading, you can fine-tune a bot to be very successful. However, novices will rarely see impressive returns from automation.

Cryptocurrency trading bots can be quite good without fine-tuning but their earnings can be easily offset by fees and commissions. Yes, automated crypto trading has the potential to bring in mind-boggling profits but the result can be equally devastating. The outcome very much depends on how well you incorporate bots in your investment strategy.

The main takeaway

The cryptocurrency market is growing in complexity meaning that automation is here to stay regardless of whether we like it or not. While the coding and architecture of a bot can be very complicated, they all work similarly and their effectiveness depends on humans who develop and program them.


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