How Do Crypto Trading Bots Work?

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Killer Whale Crypto

April 24, 2021, 8:12 PM UTC

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Crypto Trading Bots Can Enhance Your Experience

How do Crypto Trading Bots Work?

In the realm of cryptocurrency trading, there are a few available tools that allow users to stay on top of the market as well as potentially make some money, and one of those tools is crypto trading bots.

Crypto bots are software programs that execute functions using artificial intelligence based on pre-established parameters set by the user. With the parameters set, there are no more missed opportunities or missed trades. No matter the time of day, you can safely and automatically buy, sell or hold assets.

One of the benefits of utilizing crypto trading bots is the seamlessness of the program. Some come with an internet browsing plug-in allowing the trader to interact with the bot. Others offer standard operating systems that come as downloadable apps. And some even come in the form of specific software designed for cryptocurrency exchanges. Users simply do not have the time to constantly watch market trends or dips, it would be nearly impossible to try and track across all markets available. With bots, they track 24/7 across the global markets and can alert the trader when a certain type of crypto drops. As long as they are set with the user’s specific parameters in mind, they can make trades instantaneously. When human error can spring up, crypto trading bots can alleviate those stresses.

We’ve covered a little on what crypto bots are but it’s important to remember there are 4 main types of crypto trading bots: trend-trading bots, arbitrage bots, coin-lending bots, and market-making bots.

What are Trend-Trading Bots?

Trend-trading bots attempt to capture gains through the analysis of an asset’s momentum in a particular direction track. When implementing a stop-loss, discerning trends can be useful in order to capture profits or prevent losses.

What are Arbitrage Bots?

Arbitrage bots are used to identify inefficiencies and prices across different markets. They are used to capitalize on price differences between exchanges. This difference in price is know as arbitrage.

What are Coin-Lending Bots?

Coin-lending bots allow users to lend cryptocurrencies at advantageous interest rates with limited risk. They automate the process, mitigate volatile interest rates, and loan repayments by borrowers.

What are Market-Making Bots?

Market-making bots can turn a profit on the difference between the ask (selling price) and the bid (buying price) which is called the spread. When trading products with a spread, a trader will hope that the market price will move beyond the price of the spread. If this happens, it means that the trade can be closed for a profit. If the price doesn’t move beyond the cost of the spread, the trader could close their trade at a loss, even if the market moves in the direction they have predicted.

What are Inter-Exchange Arbitrage Bots?

While we’ve covered single exchange crypto trading bots, let’s discuss inter-exchange arbitrage. With an arbitrage bot, it involves taking advantage of the price differences of a single asset across many different trading platforms. For example, if bitcoin or another cryptocurrency is trading at $9,000 on one exchange and $8,950 on another, an arbitrage bot could buy the asset on the exchange where it’s cheaper and sell it on the one where the price is higher. Often these methods are used in conjunction with one another.

The crypto trading bot programs communicate directly with crypto exchanges and place orders automatically depending on your preset conditions. By communicating directly with crypto exchanges, the bots place orders automatically and instantaneously. These bots work at an exceptional speed, much faster than any human could. And unlike humans, the bot offers emotionless trading. When it comes to trading volatile cryptocurrencies, it’s emotional work. And with emotions, comes potential judgment errors. Around 39% of manual traders are influenced by our emotional states, which may lead us to irrational decisions. While the bots offer speed, efficiency, fewer errors, and emotionless trading, there can be a downside.

If you are looking for a get-rich-quick scheme, trading bots are not for you. Crypto trading bots certainly can help anyone who uses them but the true intention is minimizing risks. Crypto trading bots only provide marginal returns even when used optimally. Second, many of the bots are simply not designed well. Lastly, and most crucially, the utilization of the bot requires a deep level of knowledge of digital currency markets teamed with an exceptional supporting investment plan. Markets change, strategies alter and if you put all your eggs into one basket, it could spell trouble. For investors, a crypto trading bot can become a useful tool to aid in cryptocurrency trading but always be sure to read into fees, regulations, and preferences when shopping around, not all bots are created equal.

When it comes to crypto trading bots, ultimately they offer a number of advantages to users and when used optimally, it can be an incredible tool in the changing crypto markets. Having a thorough knowledge of how these bots operate will undoubtedly help you in the selection of the preferred one you like.

Getting started with bots?

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