Cryptocurrencies are known for being incredibly volatile, with prices fluctuating dramatically even in the space of minutes. Investors also have the opportunity to take part in cryptocurrency trading around the world and at any hour of the day. Combined, these factors limit the effectiveness of human cryptocurrency trading in several ways.
First, investors in many cases cannot react quickly enough to changes in price to achieve the optimal trades thatare theoretically available to them. Slowdowns in exchanges and transaction times further exacerbate this problem. Second, investors can simply not dedicate as much time to the cryptocurrency markets as necessary to always achieve the best trades. Doing so would require round-the-clock monitoring of cryptocurrency exchanges all over the globe.
Fortunately for many investors, there are solutions to these issues. One of the primary solutions is bots, or automated tools that conduct trades and execute transactions on the behalf of human investors. Certainly, bots are a controversial component of the market, and there are justifications for using them just as there are reasons for doing away with them entirely.
Key Takeaways
- Bots are used by traders to take advantage of the cryptocurrency markets that trade 24/7 all over the world.
- The advantage bots have over investors is they can react quicker.
- Meanwhile, most investors also don't have the time to dedicate to always get the best trade—something that bots can do.
- One key type of bot is the arbitrage bot, which looks to take advantage of price discrepancies across exchanges.
Types of Bots
There are many varieties of cryptocurrency bots. One of the most popular types is the arbitrage bot. Arbitrage bots are tools that examine prices across exchanges and make trades in order 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 fast enough can beat exchanges that are delayed in updating their prices.
Other types of bots use historical price data to test out trading strategies, theoretically offering investors a leg up. Still, other bots are programmed to execute trades at particular signals such as price or trading volume.
How Bots Work
Investors can subscribe to free bot programs to aid in their cryptocurrency trading. On the other hand, many bots have user fees, some of which can be quite steep. Typically, investors seek out the bot or bots that will be most useful for them and then download the code from a developer. Each bot includes different requirements in terms of software and hardware.
Bots can be incredibly helpful, although there remains an ongoing debate about whether they should be permitted in cryptocurrency trading. In order to maximize the impact of a bot, however, an investor must know how to best utilize the tool. For instance, investors must have the proper accounts set up across digital currency exchanges.
They must stock those accounts with cryptocurrency holdings. In many cases, they must still make investment decisions such as when to buy or sell. A crypto bot is not a get-rich-quick solution for an investor unwilling to put in the time and effort necessary for success.
While bots can help execute orders, they are not a substitution for a solid investing strategy.
Downsides of Using Cryptocurrency Bots
In terms of the issues with cryptocurrency bots—first, many bots only provide marginal returns (even when operating correctly). Second, many bots are simply not designed well.
Investors should remember that the crypto bot space is as unregulated (or more so) as the cryptocurrency world itself.
Third, and most importantly, successful utilization of a bot requires a deep knowledge of the digital currency markets and an excellent supporting investment plan. For some investors, a bot can be a useful tool to aid in their cryptocurrency trading. For others, though, by the time they've done the work to prepare themselves to adequately use a bot, they may no longer require its services.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.
FAQs
What's a Bot in Crypto Trading? Bots in crypto trading are programs that automatically execute trades much quicker than humans and can trade 24 hours a day, seven days a week. An inevitable development, crypto trading bots can be both good and bad for crypto traders.
Are crypto trading bots worth it? ›
It depends on the bot! Some lower-risk crypto trading bots boast a 99% success rate, while others execute higher-risk strategies and have a lower success rate. The main thing most investors need to consider is whether the bot they're looking at can execute their specific investment strategy successfully.
How safe are crypto trading bots? ›
Using trading bots is considered very high risk, just as trading is. There is a reason that trading platforms always have warnings stating that trading is high risk, and you should only trade with money you can afford to lose.
Which bot is best for crypto trading? ›
Cryptohopper is renowned for its cloud-based trading bot, which means users don't need to keep their computers running for the bot to operate. The platform offers a range of features, including backtesting, strategy design, and a marketplace where users can buy and sell trading strategies.
What are the disadvantages of crypto bots? ›
Complexity in Setup and Strategy Development: One of the primary challenges with crypto trading bots is the complexity involved in setting them up and developing effective trading strategies. For beginners especially, navigating these complexities can be daunting.
Can a crypto trading bot really generate money? ›
Crypto trading bots are profitable. However, it's not as simple as it sounds. You need a deeper understanding of how these tools work. You also need to be equipped with the knowledge to decide whether they are the missing piece in your crypto trading puzzle.
How much do trading bots cost? ›
Our Trading Platforms of Choice:
| Platform | Price |
|---|
| Coinrule | Four Plans — Free, Hobbyist package ($29.99 a month), Trader package ($59.99 a month), or Pro package |
| Coinigy | Two plans — $18.66 monthly subscription, and a $99.99 monthly subscription |
| 3Commas | Two plans — $49 a month, $79 a month for Expert |
6 more rowsMaking a living only through trading bots is obviously not easy, but it's not impossible either. While automated trading systems have helped some investors and traders earn money, it's far from easy to profit in the stock market due to the volatility of prices and market emotion.
Can you lose on a trading bot? ›
Traders can lose money in bot trading due to technical failures, market risks, programming errors, over-optimization, lack of adaptability, and human oversight. However, with proper risk management, oversight, and testing, traders can mitigate these risks and improve their chances of success in automated trading.
Why do trading bots fail? ›
Factors contributing to bot failures include technical glitches, programming errors, market conditions, over-optimization, lack of human oversight, and regulatory risks.
There are a number of crypto-trading bots on the market, but it's important to do your research before selecting one. Many of the most popular and reliable bots are not free, but there are some free options available, such as the Haasbot, Gunbot, and Zignaly.
Which broker allows bot trading? ›
TD Ameritrade: Offers a robust platform, thinkorswim, which supports algorithmic trading and has an extensive range of tools for strategy development and backtesting. Interactive Brokers: Known for its advanced trading platform and extensive market access. Also offers an API for automated trading.
How do I start crypto bot trading? ›
How to Build Your Own Crypto Trading Bot? A Guide
- Choosing the Right Programming Language. ...
- Setting Up API Connections. ...
- Designing Your Trading Strategy. ...
- Coding and Testing the Bot. ...
- Deploying on Cloud Infrastructure. ...
- Continuous Monitoring and Optimization. ...
- Conclusion.
SEC: The SEC regulates cryptocurrencies that are considered securities, including initial coin offerings (ICOs) and security tokens. If your AI trading bot is involved in trading or promoting such assets, it may need to comply with federal securities laws.
What damage can bots cause? ›
Malware bots, for instance, can infect computers and steal sensitive information. Bots can also carry out distributed denial-of-service (DDoS) attacks to overwhelm websites with traffic and knock them offline. Bots are often referred to by other names, such as spiders, crawlers, or web bots.
What you need to know about crypto trading bots? ›
A crypto trading bot is a computer program that uses artificial intelligence and advanced algorithms to automate the buying and selling of cryptocurrencies. Acting as a virtual assistant, these bots analyze vast amounts of market data, identify patterns, and execute trades in the crypto market accordingly.
What is the average return on a crypto bot? ›
From my experience with several bot providers, you can achieve 20% or more on a day on very rare occasions. However, the long-term average daily return is more like 0.1–0.4% for a reasonably good bot, which can still make several hundred percent profits per year considering compound effects.
Do trading bots make losses? ›
Rapid changes in market conditions, such as sudden price movements or shifts in volatility, can challenge the effectiveness of trading bots. Bots may struggle to adapt to changing market dynamics, leading to losses or missed opportunities.
What percentage of crypto bots trade? ›
There are many types of these bots grouped as per the trading strategies , arbitrage bots, coin lending bots, margin trading or leverage bots, and market maker bots. Although only 38% of crypto users trade with bots, that percentage rises to 86% when considering the amount of money moved.
Do trading robots really work? ›
Do Forex trading robots really work? Though forex auto trading robot software promises to make beneficial trades, not all automated forex trading robots are what traders expect them to be. Moreover, some federal governments consider bots to be scams.
