Crypto Trading Bots - How to Decide If You Need One
A crypto trader’s life is not easy. Market ups and downs happen in seconds, and constantly monitoring price changes to catch the moment to buy or sell isn’t realistic. A solution to this problem can be the use of automated trading tools.
In this article, we’ll explore cryptocurrency trading bots, their types, benefits, and disadvantages.
What Is a Cryptocurrency Trading Bot and How Does It Work
Cryptocurrency trading bots are computer programs that follow a certain logic to perform actions such as buying and selling. They utilize algorithms to automate the trading process. Crypto trading bots act based on technical analysis and market indicators, such as trading volume, price movements, or AI-driven predictions. A simple task, for example, a bot can perform, is buying Bitcoin when the price drops to $50,000. However, there are various complex strategies, such as calculating the average price of a cryptocurrency over a certain period and executing trades while adjusting for risk.
Different Types of Crypto Trading Bots
Based on their crypto trading strategies, crypto trading bots can be divided into several categories.
Arbitrage Bot
This type of bot utilizes the arbitrage trading strategy. Since the prices of cryptocurrencies vary across different platforms, traders can benefit from these price differences. They can buy digital assets on one platform at a lower price and sell them on another at a higher price. What a crypto arbitrage bot does is monitor and analyze different platforms simultaneously, conduct technical analysis, and execute trades.
Flash Loan Arbitrage Bot
Using flash loans allows traders to maximize their arbitrage opportunities. Flash loans allow traders to borrow large amounts of assets without initial capital and repay them in the same block. Flash loan arbitrage bots simplify the process through automation.
Robot doing repetitive tasks. Source: freepik.com
Signal Bot
The specialty of these bots is their ability to generate buy and sell signals based on the data they collect. Signal bots notify traders of the most preferable times to buy or sell.
Beyond that, signal bots can provide market news and sentiment analysis, technical indicator alerts, and other features.
Market Making Bot
Market Making Bots aim to generate profit by providing liquidity to the market and filling order books with buy and sell orders. The strategy behind these bots is to profit on the bid-ask spread, the difference between the highest price a buyer bids and the lowest price a seller is willing to accept.
Portfolio Management Bot
Building your desired crypto portfolio can be time-consuming and require a series of repetitive tasks. Here, bots designed for portfolio management come into play. Based on predefined logic, they rebalance the assets by figuring out the best moves - which cryptocurrencies to purchase more and which ones to sell.
Pros and Cons of Using a Trading Bot
If you’re about to decide whether to use a bot in your trading strategy or not, consider that they have both benefits and drawbacks.
Pros of Using a Crypto Trading Bot
- Non-stop operation: Since the crypto market operates 24/7/365, no trader will be able to respond in a timely manner to all changes. Bots work non-stop and instantly react to any news and market shifts. The crypto bot trades according to the code, even when you aren’t following the market.
- Reduced chances of mistakes: Trading bots reduce errors resulting from the human factor and emotional decisions. They execute the logic as defined with accuracy.
- Backtesting strategies: Using a trading bot, you can evaluate your strategy’s effectiveness in advance. Bots perform detailed analysis, predicting outcomes under various scenarios using past market data to assess profit potential and possible risks.
Cons of Using a Crypto Trading Bot
- Risk of errors: Bots don’t guarantee trading success. Strategies can go wrong, and technical issues may arise, such as the app slowing down or the device shutting off.
- Risk of scams: Bots directly handle your assets, and there’s a risk of getting scammed. To avoid scams, steer clear of apps promising unrealistic returns, check the bot’s website, and read reviews.
- Limited flexibility: Crypto trading bots operate based on predefined rules and algorithms. However, the market is ever-changing, and new conditions may require new actions quickly to seize trading opportunities.
How to Decide if You Need a Crypto Trading Bot or Not?
When making a decision, carefully consider the benefits/risks of crypto trading bots and whether they suit your trading needs. It’s important to note that bots don’t ensure stable profits. Before starting to use a bot, beginners need to learn about the crypto market and trading mechanisms. Profitability depends on various factors, the main one being the bot’s logic and the rules you set.
Anahit Avetisyan
Author
Web3 writer and crypto HODLer with a keen interest in market trends and recent technologies.
