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What is the role of robots in cryptocurrency trading?
What is a bot in cryptocurrency trading?
Cryptocurrency trading bots are programs that automatically execute trades much faster than humans and can trade 24/7. An inevitable development, cryptocurrency trading bots can be both good and bad for cryptocurrency traders.
Key points to remember
- Cryptocurrency trading robots are programs that automate cryptocurrency transactions.
- Bots are used by traders to profit from cryptocurrency in the global cryptocurrency market 24/7.
- The advantages of robots over traders are that they can react faster and monitor the market without interruption.
- One of the main types of bots is the arbitrage bot, which seeks to take advantage of price discrepancies between exchanges.
Types of Robots in Cryptocurrency Trading
There are many varieties of cryptocurrency robots. One of the most popular types is the arbitration bot. Arbitrage bots are tools that look at prices on exchanges and make trades to take advantage of discrepancies. Because the price of a cryptocurrency like Bitcoin tends to vary somewhat from exchange to exchange, bots that can move quickly enough can beat exchanges that are slow to update their prices.
Other types of robots use historical price data to test trading strategies, theoretically giving traders a head start. Still others are programmed to execute trades based on specific signals, such as price or trading volume. Here is a (non-exhaustive) list of robots in use as of July 2024:
- Trend Trading
- Arbitration
- Coin Loan
- Market making
- MACD (moving average convergence divergence)
- Automated trading
- Average purchases in dollars
- Semi-automated
- Artificial intelligence trade
- Grid robots
- Portfolio rebalancing
How Cryptocurrency Trading Bots Work
Bots are programs that run on computers, servers, platforms, or other devices. Cryptocurrency trading bots are programs that have access to a trader’s account and are allowed to buy and sell crypto assets on specific platforms.
These programs are usually designed to achieve specific trading goals. How they achieve these goals depends on their programming, the parameters set by the trader using them, and the strategies they introduce in the program.
Where to find cryptocurrency trading bots
You can find cryptocurrency trading bot service providers online or on specific exchanges. For example, the Binance cryptocurrency exchange provides trading bots to users in specific jurisdictions (but not the United States). If they are available in your region, you can choose from the following bots for futures or spot markets:
- Automatic investment
- Next to
- Bullish
- Bearish
- Lots
Third-party platforms like 3Commas, Cryptohopper, Pionex, and HaasOnline offer cryptocurrency trading bot services. You can choose from pre-programmed trading strategies or, in some cases, design your own. Most of these platforms are subscription-based, with additional usage fees, some of which can be quite high.
In some cases, you may be able to find the bot that works best for you and download the code from a developer. Each bot has different software and hardware requirements.
Concerns about robots in cryptocurrency trading
Traders can’t react quickly enough to price changes to make the optimal trades that are theoretically available to them. Slowdowns in exchanges and transaction times further compound this problem. They also can’t devote as much time to the cryptocurrency markets as they need to consistently make the best trades. To do this, they would need to monitor cryptocurrency exchanges around the world 24 hours a day, which is what a bot excels at.
Certainly, Bots are a controversial element of the market. They are programmed by humans and therefore prone to errors, and their persistence and speed take away some of the fairness from the market. Additionally, crypto trading bots have yet to prove that they are overall more efficient at generating profits than human traders.
Bots can be incredibly useful, although the debate over whether they should be allowed in cryptocurrency trading still rages. However, to maximize the impact of a bot, you need to know how to use the tool. For example, you will need proper accounts set up on digital currency exchangesmany of which require personally identifiable information to comply with know-your-customer (KYC) laws.
You will need to link your exchange accounts to these bots, which is a real gamble if you are giving a third-party automated program your account information and the ability to trade for you. While you can find many stories of traders using bots successfully, it is best to remember that cryptocurrency trading bots are created by people, which requires you to trust that they have your best interests at heart and will not steal your funds and cryptocurrency.
While robots can help fulfill orders, they are no substitute for solid investment strategy.
Reputable exchanges that offer trading robots may be more reliable, but again, you are trusting a program that was designed by humans. It is possible that programming errors could cause problems. If you choose a trading robot, it is a good idea to read the legal agreements and documentation to see if there are any guarantees or methods to recover your funds if a robot goes haywire. For example, if the robot encounters an error and makes a purchase when it should have made a sale, you should be notified of the action and compensated because you did not make the mistake.
Cryptocurrency robots may only provide marginal returns (even when they work properly). Successfully using a robot requires a thorough knowledge of the digital currency markets and a great supporting investment plan. For some traders, a robot can be a useful tool to facilitate their cryptocurrency trading. For others, however, by the time they have done the work to prepare themselves to use a robot properly, they may no longer need its services.
Which bot is best for trading?
It depends on whether you trust third-party bot developers or an exchange that offers bots as a service. Either way, you will need to be very familiar with trading strategies and the cryptocurrency market to be able to set up the bots. Additionally, most bots use very generic trading strategies, which may work for some, but many are not as advanced as they claim.
How Safe Are Cryptocurrency Trading Bots?
Cryptocurrency trading is risky: Adding a computer program that will trade while you are not watching or aware adds even more risk. If you like the added risk and can afford to lose the funds you have placed under its control, robots can be a fun way to trade. For most traders and investors, however, robots are very risky.
Can you make a living from trading robots?
It is entirely possible that a trading bot can generate enough income to live on. However, it is also likely that a bot can lose everything. Cryptocurrency trading bots are risky to use in an already risky market.
Are Cryptocurrency Trading Bots Legal?
If you are allowed to trade cryptocurrencies in your country, then crypto trading bots should be legal. However, there are always limitations, such as national laws or exchange rules restricting certain types of transactions or practices. Make sure you are familiar with the laws in your area before you start using a crypto trading bot.
The essential
Crypto trading bots automate cryptocurrency trading and can be programmed to trade 24/7. There are several benefits to using these bots, but there are also drawbacks. If you’re considering using a bot to trade crypto, make sure you know what it can do and have a good understanding of the cryptocurrency market and trading strategies. You’re also giving access to your money and trading accounts to a program created by someone you don’t know, so make sure you do your research before committing to using one.
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As of the date of writing, the author owns BTC, XRP, ETH, and ADA.