Compare and learn about cryptocurrency trading bots
Your guide to the benefits and risks of automating your crypto trading.
Cryptocurrency markets are famous for their volatility, which presents a lot of opportunities. Crypto trading bots are designed to leverage these opportunities better than a human could alone.
Want to keep it simple? You could try a pre-programmed crypto bot
Want more advanced options? You could try building your own cryptocurrency trading bot
How cryptocurrency trading bots work
Trading bots are computer programs that log in to cryptocurrency exchanges and automatically make trades on your behalf.
How good they are depends on how they’re programmed, and how suitable their programming is to current market conditions.
There are many different kinds of bots to suit different market conditions and individual needs. Different types of bots are known as different strategies.
For example, “scalping” is a strategy for making small but consistent profits in a sideways market. A “scalping bot” would be designed to automatically place the trades required to shave those profits out of the market. Scalping could be the right strategy for a sideways market, but wouldn’t be ideal in a more bullish or bearish situation.
So the first challenge is to know which kind of strategy to use at different times. The second challenge is to find a bot which can effectively execute that strategy based on market activity and signals.
What are signals?
In crypto trading bot terminology, signals are like alarms. For example, someone might craft a signal based on a combination of factors like moving averages, volatility and social media mentions, and when those factors move in a way that’s believed to indicate a good time to trade, the alarm is triggered.
Trading bots can be programmed to automatically respond in specific ways to these signals. You can create your own signals or use a third party’s signals. And just like bots themselves, some signals are more consistently accurate, while others are more error-prone.
How to get and use a cryptocurrency trading bot
There are two different ways of getting and using a crypto trading bot.
You can either use a pre-programmed one, or build your own.
🛠️ Build your own
These are bots that you create. You decide which signals the bot will read and which trading actions it takes in response.
Once you’ve created a bot, the next step is usually to backtest or paper trade with the bot against actual market movements, to see how it fares in real-world conditions before you entrust it with real money.
Building your own bots will always require some trading experience, but it won’t necessarily require any technical experience. On the easier end of the scale you can build you own bots with simple and intuitive graphical user interfaces. On the harder end of the scale you’ll need to have enough programming know-how to code your bot.
All platforms will let you build and customise your own bots to a certain extent, although the number of tools they provide for doing so will vary between platforms.
🤖 Use a pre-programmed bot
The other option is to use a bot that someone else has built. You can often buy these from the creators, and some platforms include bot marketplaces for people to buy and sell pre-programmed bots.
Other platforms will include a range of their own pre-programmed options, which are included as part of the subscription package.
In many cases bots will only be partly pre-programmed, meaning you won’t be able to trade with them directly “out of the box,” but will instead need to customise and adjust them
You’ll still need to know which kind of strategy is best to use in a given situation, and can often choose which signals to feed it, but will be able to use those pre-programmed bots to execute those strategies rather than needing to build your own.
Copy trade features, such as is found on a platform like eToro, is an example of a trading bot. In this case the bots just automatically mimics other traders. Some platforms will also let you use copy trade bots to get the same functionality on other exchanges.
When comparing crypto trading bots, make sure you consider the following 7 factors at least:
- Trading strategy. What strategy or strategies can the bot implement? What sort of market data and technical indicators can it analyse and what parameters can you program in?
- Ease of use. Some bots have pre-programmed strategies set up and ready to go while others allow you to program them however you want so you can implement your own strategy. The right platform for you may depend on your level of trading and coding knowledge, so make sure any program you choose is easy to understand and use.
- How to make changes. How easy is it to adjust your trading strategy and parameters? Is the bot designed to automatically rebalance your portfolio on a regular basis, or is it up to you to make adjustments as you see fit?
- Cost. Some bots don’t charge trading fees but many do. Compare the cost of different options and make sure you know exactly what you’re paying for.
- Longevity. How long has the bot been around? Is it a new program or does it have a long history of successful use?
- Reputation. Does the bot have a good reputation among the wider crypto community? Check online forums for reviews from other users to see if the bot is legit and if they would recommend using it?
- Exchanges. While most reputable bots will work with most reputable exchanges, make sure any program you choose will allow you to trade on the exchange(s) you want to use.
Benefits of cryptocurrency trading bots
Crypto bots can offer a number of advantages over manual trading.
- 24/7 trading. Unlike stock exchanges with their regular trading hours, global crypto markets are open 24/7. Humans have to sleep eventually, but a bot can keep trading 24/7. With cloud-based trading bots your computer won’t even need to be on for the bot to keep working.
- Fast execution. Cryptocurrency markets can shift extremely quickly, and some opportunities last only seconds. Bots can automatically process and act on information that humans can’t.
- Reduced human error. Manually entering trade details yourself always introduces the risk of human error. By automating trade execution via a bot, this risk is reduced. Just make sure you don’t make any mistakes while setting up the bot.
- Take the emotion out of trading. Effective trading is about having a plan and sticking to it, rather than running with gut feelings. Crypto trading bots take emotion out of the equation and react to pure data only.
- Ability to diversify. Using a bot can allow you to trade across numerous accounts or try out various trading strategies. This can help you spread risk across a variety of crypto assets.
- Backtesting. Want to test a trading idea? Use a bot to backtest, which is where you test your strategy using historical market data to see how it would have worked. You can also paper trade, which is when you use a bot to trade pretend money against the markets of today.
Risks of using crypto trading bots
Bots are not free money machines, and they’re not without some risks and downsides
- Scams. Scams are an ongoing problem in the crypto trading bot space. It’s essential that you thoroughly research any bot before use to help safeguard your funds against scammers. For example, if you come across a bot that promises “guaranteed” substantial gains, this should sound alarm bells.
- Setting and forgetting. There’s a common misconception that once set up, a bot can simply be left to do all the hard work for you and make money while you sleep. This isn’t the case. Rather than being passive income generators, crypto trading bots need ongoing monitoring and adjusting as market conditions change.
- Poor-quality software. The quality of software varies from one bot to the next and using a poorly coded bot could cause you to lose money. That’s why you need to look for a reputable bot with a proven track record of success.
- Bad strategies. The crypto market is constantly evolving and trading strategies need to keep adapting to achieve success. If you choose a bot with an outdated or simply inadequate strategy, or match the wrong bot and signals, program it incorrectly or otherwise make mistakes, expect to lose money.
- Failing to set stop-loss limits. In the event of a “flash crash”, where the price of a cryptocurrency plummets rapidly, traders that have not set stop-loss limits could potentially suffer heavy losses.
- Crypto market complexity. There’s only so much that exchange data can tell you about what is happening in the crypto market. From tech developments to the online rumour mill, there are many other factors that can drive price movements.
Popular crypto trading bot strategies
Crypto trading bots can be used to implement a wide range of trading strategies. Some of the most commonly used strategies include:
Cryptocurrency arbitrage is a strategy that allows you to take advantage of price differences between crypto exchanges. For example, buying bitcoin on an exchange where the price is low and immediately selling it on an exchange where the price is at a higher level.
Specialist crypto arbitrage bots are designed to track price movements and differences across exchanges and then execute the necessary trades.
The market-making strategy involves continuously buying and selling cryptocurrencies and digital currency derivatives contracts in order to profit from the spread between the buy and sell prices. Market makers earn a profit by providing liquidity to other traders by placing limit orders on both sides of the order book and making their income from price fluctuations.
For example, if Ethereum is trading at $500, you could create a buy order for $499 and a sell order for $501. When both orders are filled, you earn $2 profit.
This strategy involves programming a bot to identify the price trends of specific cryptocurrencies and then execute trades based on those trends. By analysing which way the price of an asset is moving, this strategy is designed to assess when trends are forming and then profit from the resulting price change. In other words, buy when prices are trending upwards and sell when they’re heading down.
The key underlying principle of the mean reversion strategy is that there is a stable trend in the price of a particular cryptocurrency. So while the price may fluctuate in either direction, it will eventually return to its mean.
Based on this assumption, you can program a bot to execute trades depending on where the price of the currency sits in relation to its historical average.
Bot trading safety tips
There are some basic rules whenever you use a bot for the first time:
- Don’t give your bot withdrawal access. In most cases, there’s no need to give a bot permission to withdraw funds from your account, so preventing withdrawal access can be a simple way to protect yourself. Of course, if you’re performing arbitrage trades between exchanges, you will need to grant withdrawal access.
- Don’t share your API secret. In order to put your bot to work, you’ll need to create an API key and secret on your chosen crypto exchange. API secrets are like crypto wallet private keys. If someone has your API key and secret they can place trades from your account, so never share with anyone.
- Use 2-factor authentication. Enabling 2-factor authentication on all exchanges, accounts, wallets and crypto programs can provide an extra layer of protection for your funds. As always, make sure you also set strong passwords.
- Backtest your strategies. Backtesting allows you to trial your trading strategies using historical data. While there’s no guarantee that a strategy which would have worked in the past will be profitable in the future, it’s worth running some simulations to determine whether it might be worth putting your strategy into use in the real world.
- Limit your losses. Use tools like stop-loss orders to ensure that losses are minimised when the market moves against you.
- Develop an understanding of technical analysis. The more advanced trading bots can assess a variety of technical indicators when executing trades, so developing an understanding of cryptocurrency technical analysis could help you get more out of your bot.
- Don’t over-commit. Bot trading can be quite complicated and may take a while to wrap your head around, so start with small amounts as you build your knowledge and confidence.
- Track your trades. Finally, don’t forget that your trades will have tax implications, so keeping records of your crypto transactions is essential.
Cryptocurrency trading bots can be an extremely handy tool for traders, but only when used properly. They offer a handful of key advantages, such as being able to constantly interact with the market and taking the emotion out of trading, but they’re certainly not a “silver bullet” that can guarantee you’ll make a profit.
The many risks associated with crypto trading bots mean the best approach is to proceed with caution. If you know what you’re doing and you’re prepared to constantly monitor performance, trading bots can form an important part of your overall trading strategy. However, going all in and using bots as the be-all and end-all of your crypto trading strategy is not recommended.
Finally, make sure you thoroughly research any bot to be sure of its legitimacy and whether or not it could be a useful trading tool for you.
Cryptocurrency trading bots at a glance
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