7 Questions & Answers About Crypto Trading Bots
In this article we tell you all about what “cryptocurrency trading bots” are, how they work, and how to get started using them.
The idea of cryptocurrency exchange trading bots is not new and dates back all the way to the days of MtGOX, which was famously manipulated by a pair of trading bots to cause the price of BTC to rise to $1,000 for the first time in its existence. It is trading bots that perform the vast majority of all trades and that process the most trading volume. They can run 24/7 with minimal human supervision and scour multiple exchanges simultaneously looking for the best deals or trades.
Basically, almost every time you place a trade you will be competing with trading bots to get your order filled. This has compelled some traders to adopt the “if you can’t beat ‘em, join ‘em” mentality, and taking up bot trading is easier to do now than ever before. All it requires is an account at an exchange with API functionality and a little bit of knowledge of how to connect the bot to the exchange.
Once a well-designed trading bot is up and running, there’s no easier way to make money on the side, and indeed such bots can be quite profitable. However, bots that employ losing strategies or aren’t correctly programmed can prove to be quite costly, which is why it’s important to have a proper understanding of what you’re doing before attempting to do it.
1. How do trading bots work?
Trading bots are programs or scripts that connect to your exchange from a server. They control certain parts of your account in order to make trades. They interface with the exchange’s API in order to get data from trading pair orderbooks, using this data to guide trading decisions automated by one or more algorithms.
Most major exchanges offer API services to their customers. API is short for “application programming interface.” Think of it like a portal that allows an app (trading bot) to connect to the internet (exchange data). Exchanges generate 2 keys that are needed by a bot in order to access your exchange account.
Usually trading bots are not used to perform account-specific actions, such as automating withdrawals, and there are ways to assure that a bot cannot withdrawal funds from your account (such as by limiting the bots withdrawal functionality).
2. What are the advantages of using trading bots?
There are a few reasons why trading bots can be superior to placing manual trades when used correctly. For one, they allow trades to be executed with lightning speeds. You may have heard about high-frequency trading as it applies to the stock market. This is also done through bot trading and can be emulated by cryptocurrency exchange trading bots as well. Orders are placed accurately each time, eliminating the possibility of “fat fingering” incorrect and potentially costly orders.
Another big advantage that trading bots have is they remove the element of emotion from trading. Manual traders may go into a trade with a good plan but they often get caught up in worrying about its outcome halfway through and prematurely pull the plug (or alternatively, wait too long before closing a trade). Bot trading, also known as automated trading, removes unnecessary risks introduced by emotional interference. These risks can manifest themselves in a variety of unpredictable ways, which is why it’s a good idea to cut them out of your trading entirely with a bot.
Traders may sometimes also forget to open or close a trade, or may not be able to make the calculations necessary in time to determine if a trade is profitable. All of the factors mentioned above are being handled simultaneously by a trading bot, which is what makes them such a great tool for any cryptocurrency trader.
3. What types of trading bots are there?
You’ll want to find a bot that is suited for your trade time frame, amount of capital, and level of risk. You should consider these factors instead of just seeking the bot with the highest advertised return. Here are some trading strategies frequently employed by cryptocurrency exchange trading bots:
- Basic trading strategies. These are bots that place simple buy/sell orders in an attempt to carry out a basic strategy of trend-following or else a “buy the dip”-type strategy.
- Margin/leverage trading. For exchanges that offer margin and/or leverage trading, bots can be used to place both long and short orders. Keep in mind high-leverage trading can be extremely risky.
- Arbitrage. This involves coordinating the trades across multiple exchanges, namely identifying profitable spreads in which a quick profit can be made by instantly buying coins on one exchange and selling them on another.
4. What exchanges are the best for crypto trading bots?
Some major crypto exchanges that have good reputations, high amounts of liquidity and API portals for traders include:
- Coinbase Pro
5. Are there any good trading bot services?
Yes, there are a few, and some of them are quite sophisticated. Some, on the other hand, are scams or borderline scams, so it’s important to make sure the service you are dealing with has a good reputation and a track record for making positive trades. We recommend starting out with one of these crypto trading bot softwares to get an idea of how bots work before attempting to build one of your own:
- Bitsgap: This is a newer trading bot service that can connect up to 30 different exchanges, leading to one of the most powerful subscription-based bot services on the web. They have also won numerous contests with their unique trading algorithms. Bitsgap offers cloud-based monthly subscription crypto trading bot services from $19 per month to $110 per month based on trading volume and extra options. There is also a free option that allows up to $1000 in trading per month so you can try before you pay. If you sign up using our link, you will be upgraded to the premium “Unlimited” plan during your 14 day free trial.
- Gunbot: In operation since 2016, Gunbot is a user-friendly trading bot service that allows subscribing members to choose from 14 different trading options, including an arbitrage bot. Gunbot has a small but dedicated user base and is a great place to start with bot trading. Gunbot is a one time purchase that runs on your local machine. Prices range from 0.02 BTC to 0.125 BTC plus advanced automated trading strategies for 0.035 BTC.
6. How can I tell if a trading bot and/or service is a scam?
Since the use of trading bots is pretty much completely unregulated, there are several different types of scammers out there looking to capitalize on those seeking easy profits. The most common type of scam involves high fixed returns provided by some sort of black box trading system. The scammer takes your BTC (or money) up front and tells you it is being put in a trading bot-driven investment. Victims frequently overlook the fact that they are giving up control of their coins in order to pursue extraordinary profits.
Ideally, it is much safer to retain control of your coins at all times by only letting a trading bot have access to your trading privileges and never withdrawal privileges. Don’t ever provide a service with your API private key (only public key), and just remember the #1 rule when it comes to scams: if something sounds too good to be true, it most likely is.
7. How much money do I need to run a trading bot?
Unless you are building your own bot from scratch or running a free bot from your own server, you will likely have to pay some sort of monthly fee to operate a bot on your account. The cheapest way to use a bot without learning the intricate details of programming is to learn enough about your exchange’s API so that you can find a free template of a pre-existing bot and teach yourself just enough to customize it for your purposes.
Beyond potential server or subscription fees, the amount of money it takes to run a bot can vary tremendously from small to big. As a general principal, it’s a good idea to never give a trading bot control over more money than you are prepared to lose. This especially applies to those who are just starting out using trading bots for the first time. Depending on what type of strategy you are employing with your bot, you’ll want to have a decent amount of capital in order to make meaningful trades. Most bots need at least $100 to $1000 in order to make efficient-sized orders.
Have any other questions about cryptocurrency trading bots that we didn’t get around to answering? Feel free to ask them in the comment box below and we’ll get back to you as soon as we can.
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