Cryptocurrency trading bots – All You Need To Know
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When it comes to the future of money, there is a growing consensus that digital currencies will play a key role in shaping it. One cryptocurrency in particular – Bitcoin, has immensely transformed how the financial industry operates today by spearheading the adoption of a cashless economy whereby financial transactions are embedded in a digital ecosystem with digital currencies being used as the mode of payment. Besides Bitcoin, the cryptocurrency market offers over a thousand different cryptocurrencies that can also be used for the same purpose.
The increasing popularity and adoption of cryptocurrencies have also seen a meteoric rise in the number of cryptocurrency exchanges available today. Cryptocurrency exchanges are the backbone of the cryptocurrency industry since they facilitate the trading of these cryptocurrencies for other assets such as fiat money or different crypto assets. Cryptocurrency trading has evolved over the years and the latest of these advancements is the introduction of cryptocurrency trading bots. Below we will delve deeper into these trading bots, determine how they work and explore the benefits and shortcomings of using them in cryptocurrency trading.
What are cryptocurrency trading bots?
Cryptocurrency trading bots are software programs that combine big data investment principles with trading strategies to recognize patterns and automatically place trades on behalf of its users. Traditionally, manual trading was the only option that investors had for placing profitable trades. This required the investor to be ever-present in order to keep constant track of price movements and determine the best time for placing a profitable trade. This was not only frustrating and time-consuming but also practically impossible.
Advancements in technology presented a solution to this problem through the development of automated trading bots that are able to aid crypto investors in the complicated trading process. Trading bots have been designed to run 24/7 and hence they can effectively monitor various market indicators such as price, time and quantity to establish patterns and execute profitable trades appropriately. Bot trading is synonymous to Algorithmic trading because they both allow the trader to define a given set of rules that the program will use to execute trades. This, therefore, makes trading bots to be tools for effective and efficient trading rather than passive income generators that make you money while you sleep. Trading bots were first used by hedge funds in the equity, commodity and currency markets but have since expanded into the foreign exchange and crypto asset market where they are used by both traders and casual investors.
How crypto trading bots work?
In essence, crypto trading bots work by first interacting directly with cryptocurrency exchanges using APIs in order to obtain information from the exchange. This information includes market volume, orders, cryptocurrency prices and time. The bot will then interpret this information and respond appropriately according to a set of rules predefined/ preprogrammed by the user. For instance, if a user programs the trading bot to execute a trade in the next 48 hours once the price of Bitcoin reaches 10,000 USD, the bot will monitor the price of Bitcoin in various exchanges and execute the trade as soon as that target is reached in a given exchange within the 48 hours set. This capability enables traders to stay in control of their trading at all times which in turn increases profitability.
Unlike conventional financial markets which provide direct access to market information to brokers and investment houses only, the transparency nature of blockchain allows average users to also gain access to market information from different cryptocurrency exchanges. This brings power back to the investors and enables them to gain even greater profits from their investments as compared to those using conventional financial markets.
Although the cryptocurrency market is still less mature than other financial markets, significant strides have been made in terms of offering a wide range of trading strategies for various users. Below we discuss the most popular trading strategies used by crypto trading bots.
This is one of the foremost strategies that has been in place since the early days of cryptocurrency trading. Arbitrage involves using a trading bot to buy crypto assets in one market and sell them in another market at a profit. This strategy was made possible during the inception of cryptocurrency exchanges which had significant price differences between each other. However, with advancements in technology, price differences between exchanges have become much smaller today, making it difficult to make significant profits out of this. Notwithstanding this, arbitrage also offers another viable option that involves the use of futures contracts. Here, traders can make profits by investing their crypto assets today and selling them in the future after a predefined period of time during which prices are expected to rise significantly.
This strategy involves using trading bots to provide liquidity in a given market and accumulate profits from the difference between the buying and selling price. The point of this strategy is to make numerous buy and sell limit orders at price ranges close to those of the market at the time. As prices fluctuate, the trading bot continuously and automatically places trades that capitalize on the spread. This strategy is profitable in high liquidity environments hence it’s ideal for use in exchanges with a high number of users.
Risks/dangers of using cryptocurrency trading bots
Although trading bots promise to make beneficial trades for their users, not all of them are what traders expect them to be. In fact, a lot of people in the cryptocurrency community consider trading bots to be a danger to cryptocurrencies as a whole. Perhaps this can be explained by a similar occurrence that took place in the US stock market. On 6th May 2010, the stock market collapsed leading to companies losing over 9% of their value in a matter of minutes. Investigations into the matter found out that a small trader based in London used a trading bot to rapidly place sell orders to drive down stock prices, cancel the orders before the trade went through and then buy the stocks at a lower rate.
The cryptocurrency market, if not well regulated, also runs a risk of facing a similar problem brought about by using trading bots to manage crypto assets. To sum it up, there are three main dangers associated with using trading bots for cryptocurrency trading.
- Faulty software–Faced with shrinking deadlines, escalating costs and a need to get their product to the market quicker, some trading software (bots) vendors sacrifice certain critical processes involved in software development such as software testing and validation. This leads to the deployment of faulty/ sub-standard software which exposes users to risks of losing large amounts of their cash while using them. It’s therefore paramount for traders to take their time and assess the effectiveness of different trading bots before settling on one to use.
- Flash crashes – A flash crash is a rapid, deep and volatile fall in trading prices occurring within a short time. Flash crashes are usually brought about by trading bots when they place high-frequency trades on a given market. One occurrence was reported back in June 2017, when the price of Ethereum crashed for seconds on the GDAX exchange. This occurrence can be curbed by users programming the bots by setting given stop-loss limits instead of letting the trading bot automatically execute trades for them.
- Scams – This is perhaps the biggest risk involved when using trading bots not only in forex trading but also in cryptocurrency trading. There are numerous reports on the internet of people using certain trading bots which all of a sudden disappear and shut down going away with users’ assets in the process. This is especially the case with free trading bots that offer unrealistic promises to their users. Therefore, users should be wary of this by reading various online reviews and testimonials to check on the legitimacy of the trading bot before settling on it.
Top cryptocurrency trading bots 2018
Currently, there are tons of cryptocurrency trading bots available in the market some of which are free and open-source while others are proprietary and hence require a subscription. Each of these trading bots varies in usability, quality,and profitability. Below we discuss some of the most prominent trading bots one can use today.
The is a cloud-based trading platform that provides users with fully automated trading solutions via the internet. The platform leverages cloud computing technology to provide its services and hence users don’t have to install the software on their own systems. The platform provides a marketplace where users can buy and sell different trading strategies either for free or at a fee. Cryptotrader features diverse currencies and exchanges such as Bittrex, Poloniex, Binance, Kraken, Coinbase among others. Moreover, the platform provides a backtesting tool which allows users to thoroughly evaluate how different trading strategies would work under different market conditions. Cryptotrader offers five different subscription plans which include Basic, Regular, Professional, VIP,and Premium. Each of these plans has a monthly subscription fee ranging from 0.002 BTC to 0.0246 BTC. Payments are accepted in either Bitcoin (BTC) or Litecoin (LTC).
Haasbot is a desktop trading software that was founded in January 2014 by the HaasOnline company. This software is one of the most complete trading bots available today since it handles a lot of work with minimal input required from the user. Haasbot supports features such as historical and real-time backtesting, advanced notifications and reporting, and fully programmable script bots written in C# that allow users to fully customize the bot as needed. Furthermore, the platform supports multiple currencies and major exchanges that gives users diverse options to trade in. Haasbot offers three different subscription plans depending on the skill level of the user. These include Beginner, Simple (Intermediate) and Advanced plans. Each of these plans can be subscribed for either on a quarterly, semi-annual and annual basis. For the quarterly plan, prices range from between 0.028 BTC to 0.08 BTC for the different plans. Payments are accepted in Bitcoin (BTC) only.
Zenbot is a full-scale, lightweight and open source cryptocurrency trading bot that can be used for handling multiple crypto assets. The bot can be downloaded for free from Github and its code can be modified to make the bot more intelligent or to suit the needs of the user. Zenbot has been developed using node.js and MongoDB. The software uses a technical analysis approach to execute different trading strategies. Furthermore, the bot provides high-frequency trade execution, extensive backtesting tools, and a paper trading function to test strategies in real-time. The developer of this software warns potential users against using the bot with large amounts of trading capital since some users have reported losses while doing this with the live trading feature.
Gekko is a completely free and open-source trading bot for Bitcoin traders. The software can perform numerous functions such as aggregating live market data, executing live orders, simulating order execution (paper trading), calculating profit and risk metrics, managing and importing historical market data among other functions. The platform allows users to create their own marketing strategies and to test them using either historical or live market data. Furthermore, Gekko currently supports 25 different exchanges including major exchanges such as Bitfinex, Bitstamp, and Poloniex. Gekko is relatively straightforward which makes it ideal for use by beginners who need to gain a grasp on how cryptocurrency trading bots work.
Trading bots are vital resources that are instrumental in achieving success in cryptocurrency trading mainly because they reduce stress levels and eliminate emotions that are usually involved in the manual trading process. By maintaining an open mind, trading bots are able to execute trades based on facts and logic rather than sentiments.
Whereas trading bots are important tools for automating trading and making it easier and fast-paced, traders still need to develop their knowledge about cryptocurrencies and the market. By understanding the full breadth of the industry and the market, traders will be more equipped to handle various challenges encountered in the trading process.
I hope that the content shared here has been insightful and eye-opening to you. Kindly visit our site for more information on other cryptocurrency related topics.