Cryptocurrency trading bots are automated trading systems that make crypto-trading easier by simplifying the process of investing. One advantage is, they offer better efficiency and make fewer errors. They also escape from emotions and sentiments that humans can seldom escape from, which is helpful because crypto markets are notorious for dramatic price movements.
Cryptocurrencies are hyper-volatile assets. Unlike traditional markets, trading in crypto happens round-the-clock and crypto traders may find it difficult to react to price moves in a timely manner. This is where crypto trading bots can come in handy. Traders can leverage the pre-defined set of rules into a robot to execute the trade in the most efficient way possible.
But how do these trading bots function and who sets the criteria for trades? Let's take a look at the various types of bots available, how they work, and the risks involved.
What are cryptocurrency trading bots? How do they function?
Cryptocurrency trading bots are automated trading systems that work on behalf of the investor. They allow you to execute trades automatically when specific conditions for that trade are met. These bots take into account information, like current prices and volatility levels. In short, they simplify the process of investing and make crypto-trading easier.
Bots offer relatively better efficiency than humans and make fewer errors with little room for emotion or sentiment. This is especially helpful since the crypto market is notorious for dramatic price movements. According to estimates, algorithmic trading bots account for 70-80 percent of the overall crypto trading volume.
Most crypto trading bots offer the following services:
Data Analysis: Bots scan raw market data from a variety of sources, interpret it and conclude whether to buy or sell. Many bots let users customise the types of data to provide refined results.
Risk Prediction: This is a critical feature of a crypto trading bot. Bots leverage market data to estimate the potential risk of an asset. This information helps the bot to decide how much to invest or trade.
Buying/selling crypto assets: Crypto trading bots use API keys (Application Program Interface) to strategically buy or sell cryptocurrency assets. The API key acts as a password that your trading bot will need to operate your account and make cryptocurrency orders. This is useful when you may want to avoid the bulk purchase of tokens.
Types of Bots
Crypto trading bots are highly customisable, and you can set the algorithm based on your long- or short-term investment plans. Here are some popular types of crypto bots available today.
Arbitrage Bot: One of the most popular types, arbitrage crypto trading bots, compare prices across different exchanges. It then makes trades to benefit from the price discrepancies. Given the high volatility in the crypto market, arbitrage bots help to automatically set Buy and Sell orders when there is an opportunity to make a profit. That said, returns from arbitrage bots can be marginal.
Trend trading bots: As the name suggests, trend trading considers the momentum of a particular asset before executing a buy or sell order on it. If the trend signifies an increase in price, the bot will trigger a long position. Similarly, when the price falls, it will trigger a short position.
Coin lending bots: These bots let you lend coins to margin traders as a loan that will be returned with interest. Coin lending bots help you automate the process. You will spend less time scouting for the right interest rate and it will help you get better rates. It is, however, important to note that crypto trading bots are only tools to automate trading. But they may not be meant for everyone. It is important you research well before picking bots or you can even end up with losses.
Bots are also fraught with risks. Programming errors, too, can hamper the efficiency of these robots. Bear in mind that bots work on the conditions and actions set by you. Ergo, you need to have a good understanding of cryptocurrency and a sound investment strategy for a crypto trading bot to function to your advantage.
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