What are Crypto Trading Bots? Benefits and Risks of Crypto Trading Bots

What are Crypto Trading Bots?

Crypto trading bots are software programs that automatically execute trading orders, on behalf of investors, based on predefined criteria. The main aim of using crypto trading bots is to generate profits by taking advantage of market trends and executing faster and more efficient trades.

Even though the concept of trading bots exists even in traditional industries, its use-case in the crypto industry is noteworthy. A single crypto news can skyrocket or adversely affect a cryptocurrency’s price. By the time you learn that, login to your trading platform, and execute a trading order, the trend could reverse. In this type of scenario, crypto trading bots will be very handy to take advantage of market trends.

How Do Crypto Trading Bots Work?

Since trading bots are software programs, they analyze and process market data, price trends, trading volumes, and orders faster than humans. The same way, they also execute trading orders faster eliminating human limitations.

Different trading bots are programmed to execute different types of orders based on different types of market indicators and parameters. Most of these market parameters include cryptocurrency prices, volume, time frame, order book data, and technical indicators like moving averages, bollinger bands, etc.

In manual trading, traders monitor these technical parameters and indicators closely and make trading decisions. When it comes to crypto trading bots, investors need to connect a crypto trading bot’s API to the crypto exchange platform they use. And, they pre program crypto trading bots and define a set of crypto trading strategies based on market parameters. Thus, trading bots automatically execute orders when these predefined conditions are met.

Types of Crypto Trading Bots

Among the many types of crypto trading bots, divided based on their functionalities and trading methods, we will discuss the most common types here.

• Arbitrage bots: Crypto arbitrage bots help investors with arbitrage trading of cryptocurrencies. They find out the small price differences of cryptocurrencies between different platforms. And, automatically buy cryptocurrencies at lower prices and sell them on other platforms at higher prices to make profits.
• Market-making bots: Market-making crypto trading bots pay close attention to bid-ask spreads and leverage the price differences. They execute quick buy and sell orders to make profits while providing liquidity to the order books.
• Trend-following bots: These bots focus on the current price trends of cryptocurrencies and execute orders to make profits out of them. They analyze the momentary fluctuations and trends of a crypto. When the prices align with predefined conditions, they quickly execute buy and sell orders.

Benefits of Using Crypto Trading Bots

• Automation: Crypto trading bots are on 24/7 just like the crypto market. Trading bots automate the crypto trading process for investors who do not have time to monitor the market trends. They automatically execute orders when predefined data points are met.
• Emotionless Trading: The volatile nature of cryptocurrencies often lead to FOMO and impulsive investment decisions. Crypto trading bots eliminate this by automating the trading process.
• Efficient Market Analysis: Crypto trading bots and monitor and analyze market price data and trends efficiently. They can process vast data instantly and monitor price changes on different platforms. This is often rare when it comes to human trading.
• Backtesting: Crypto trading bots can backtest their trading decisions before involving actual funds and risk losing them. Trading bots backtest their strategies on historical data to find out the viability of their trading decisions.
• Diversification: Trading bots monitor and analyze the performances of a variety of cryptocurrencies and make investment decisions. This helps investors to diversify their portfolio and distribute risk on different types of assets.

Downsides of Using Crypto Trading Bots

The usage of crypto trading bots also comes with certain risks and challenges. Despite being an efficient and faster way of executing trading orders, they should be regularly monitored to adjust the predefined criteria. Let us discuss more of the crypto trading bots downsides here.

• Crypto trading bots are technically complex and are often not suitable for beginner traders. Besides, crypto trading bots cost a premium to access all the features.
• The crypto market is highly volatile and trading bots quickly execute orders. Unless the predefined conditions are regularly adjusted based on current market conditions, they can make adverse trading decisions.
• There is a possibility of software-related issues in crypto trading bots. Investors need to monitor the performance of trading bots and ensure that they are working properly.
• In order to execute trading orders, crypto trading bots should have the access to your funds and crypto exchange platforms. This can lead to security-related risks. So, it is important investors choose the most reliable and secure crypto trading bots.
• Despite being a faster and more efficient way of executing trading orders, crypto trading orders does not always guarantee profits.