The highly volatile cryptocurrency markets, especially amongst many smaller altcoins, can provide opportunities for investors looking to grow their portfolios using cryptocurrency trading bots.
Crypto trading bots make buy and sell decisions based solely on available data and trends, which removes the emotional decision-making process, where many crypto traders lose their shirts. They can also trade for you while you sleep.
However, like any other AI tool, you must research crypto trading using automated trading bots before jumping into crypto trading.
This article explains how crypto trading bots work and offers suggestions for newbie traders using this technology to enter the market.
What is a crypto trading bot, and how do they work?
Cryptocurrency trading bots are simply computer programs that use an automated trading system to create buy and sell orders which are then executed by the program. Each bot has its own set of rules and parameters (usually customizable by you) based on a larger trading strategy. These trading strategies are based on technical analysis and advanced statistical and mathematical calculations which govern each trade's entry and exit points.
When you open your cryptocurrency exchange account and deposit funds, you set up your account with the bot trading platform. That platform will then access your crypto exchange using Application Programming Interfaces or (APIs). This is where your trading robot communicates with your exchange to execute buy or sell orders.
Your crypto trading bot bases its trading strategy on the parameters you establish. They are very easy to set up. For example, if you are trading contracts for difference or price differences between coin pairs – you list which coins you want to trade. You usually allocate around $3000 for each bot and have minimum and maximum price ranges.
Each transaction results in the opposite coin in the pair being purchased so your capital still remains. As the market micro volatility continues, the reverse transaction happens. Once again, the exchange fees are deducted from the proceeds, and the profit is deposited to your exchange account, which is then immediately available for you to spend or reinvest.
Are crypto trading bots profitable?
There are opportunities to make money based on the extreme volatility, particularly amongst some of the smaller and newest altcoins, even when the market is in a downturn (as it is now). You can make good profits by trading altcoin pairs with the lowest fees. This may mean focusing on coin pairs that aren’t on the Ethereum blockchain (which has higher fees). Coin pairs found on the Solana (SOL), Avalanche (AVAX), and Binance (BSC) blockchains offer potentially higher profit margins because of the lower fees. This allows you to trade more frequently for a much lower fee.
A word of warning – not every crypto trading bot will make you money. Before diving into this market, you must closely examine specific features before choosing the best trading bot for your needs. A good starting point is making a list of trading bots on the market and scrolling through customer reviews, which should include a discussion about each product's overall performance and profitability.
Features to consider when choosing a crypto trading bot
There are five areas to focus on: reliability, security, ease of use, profitability, and price.
A reliable crypto trading bot must have a stable platform that can trade around the clock without going offline because of a computer glitch. A simple Google search using the name of the bot and the words “platform security” is a good start followed by checking customer reviews.
The second aspect you need to consider is how secure the bot is. Hackers frequently target trading bots and newly created decentralized cryptocurrency exchanges. A secure trading bot should have features that make its platform less likely to be penetrated by malicious code. Pionex assures customers that their platform has been operating securely for a set number of days (see image below).
You should also carefully research the individuals behind the trading bot to assess their professional credibility. Ask yourself the professional experience level of their leadership team and what size portfolios they have managed in the past (with what degree of success). Professional automated trading bot platforms like Coinrule (established in 2017) lists the founders on their website along with links to their professional LinkedIn profiles in the image below.
A good trading bot will have information on its website detailing its security practices. Customer reviews will also give you a clue as to the robustness of their system.
If you are new to trading and not particularly technologically savvy, it’s worth choosing a trading bot that is easy to use. The user experience (UI) should include an intuitive interface for traders of all skill levels and excellent customer support services at the back end.
The success of any trading bot is always measured in terms of profits. You should be able to assess each bot's profitability based on information provided on their website showing their trading track record. Customer reviews are even more helpful here.
Consider the price of each trading bot you consider. Remember the old maxim, if the product is free, you are the product (examples include Facebook and Google constantly harvesting your data for marketing purposes). Generally speaking, a bot that charges its users a fee will offer the user superior features and a higher level of service. Fees can range from $7 to $30 a month or more. But there are also some excellent exchanges like Pionex which has 16 trading bots included in its platform which is free to use. Kucoin is another good example of a high-volume exchange with lots of good trading opportunities and they have a trading bot you can use free of charge.
What are the pros and cons of crypto trading bots?
The key advantages of crypto trading bots include the following:
- They are emotionless. Orders are only placed based upon existing data and the parameters you set in advance. Emotionless trading eliminates the risk of human error from making a quick trade based on FOMO or panicking in wildly volatile markets.
- They allow you to backtest your trading strategy. In this way, you can eliminate potential mistakes and calculate your expected returns.
- They help you as the trader to remain consistent.
- Faster speeds and highly efficient. Pre-processed orders allow you to enter and exit volatile markets to profit from micro fluctuations in altcoins.
- They diversify your trading portfolio and help you to spread your risk across different instruments.
- They work while you sleep. Trading bots monitor prices and trading patterns 24 hours a day.
If you want to dig deeper into the advantages and disadvantages of your trading platform we recommend you join online crypto trading communities specific to your trading bot. In forums such as Discord, Telegram, Facebook, and Reddit, users share their experiences (including their frustrations) when using that particular platform.
The main disadvantages of crypto trading bots are:
- You do need to monitor their performance. You can’t simply set and forget. And if you have one incorrect variable in your trading bot configuration – you can lose money very fast. You also need to keep a close eye on world news and anything which affects the financial markets. You may need to change your trading strategies to meet changes in economic conditions, which could make your existing parameters less profitable.
- You need to have some prior experience and background knowledge about cryptocurrency and global financial markets. Even though some bots come with pre-set parameters, you need to understand how they work the way they do and how best to preconfigure them if market conditions change.
- There are security risks around their use as the trading bots communicate with cryptocurrency exchanges using Application Programming Interfaces (APIs). This is where two machines work without human intervention, similar to an AI. Centralized bots can be vulnerable to hackers and they will always pose attractive targets to malicious users seeking to profit from any loopholes. You can take steps to mitigate this by ensuring that your API key is kept secret and tweaking your account settings by switching off automated withdrawals.
Overall though, crypto trading bots and the AI behind them can help you learn to become a better trader. But before diving into this emerging technology you need to have done your due diligence about the bot you are using particularly in relation to the security and stability of the platform.
Success in cryptocurrency trading is measured in profitability. Initially, you may find that crypto trading bots might only deliver marginal returns while you are still learning how to use them, but don’t let this discourage you. The size of your returns will also be determined by how much capital you have available to invest. It is crucial that you have a sophisticated understanding of the digital currency markets before diving in.
Remember that a cryptocurrency trading bot will never completely replace a human trader. Still, if they are used correctly, they can help to grow your investment portfolio at the pace you require. But getting started, you must always do your own research (DYOR) and learn from other experts in the field. There is loads of free educational material online which can help you learn how to trade effectively and how to produce consistent returns on your investments.