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What is a Bot in Crypto Trading?
Bots in crypto trading are programs that automatically execute trades much faster 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.
Key takeaways
Types of Bots in Crypto Trading
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 trade to take advantage of inconsistencies. 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 trading strategies, theoretically giving traders an edge. Still others are programmed to execute trades on specific signals, such as price or trading volume. Here is a (non-all-inclusive) list of bots in use as of July 2024:
Trend Trading Arbitrage Coin Lending Market Making MACD (Moving Average Convergence Divergence) Automated Trading Dollar Cost Averaging Semi-Automatic Artificial Intelligence Trading Grid Bots Portfolio Rebalancing
How Crypto Trading Bots Work
Bots are programs that run on computers, servers, platforms or other devices. Crypto trading bots are programs that gain access to a trader’s account and permission 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 it, and the strategies they input into the program.
Where to Find Crypto Trading Bots
You can find crypto trading bot service providers online or on specific exchanges. For example, cryptocurrency exchange Binance offers trading bots to users in specific jurisdictions (but not the US). If available in your area, you can choose from the following bots for futures or spot markets:
Auto InvestSidewaysBullishBearishBatches
Third-party platforms such as 3Commas, Cryptohopper, Pionex and HaasOnline offer crypto 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 user fees – some of which can be quite steep.
In some cases, you may be able to find a bot that is most useful to you and download the code from a developer. Each bot has different requirements in terms of software and hardware.
Concerns About Bots in Crypto Trading
Traders cannot react quickly enough to changes in price to achieve the optimal trades theoretically available to them. Delays in exchanges and transaction times further exacerbate this problem. They also cannot devote as much time to the cryptocurrency markets as is necessary to consistently achieve the best trades. Doing so would require around-the-clock monitoring of cryptocurrencies around the world, something a bot excels at.
Certainly, bots are a controversial component of the market. They are programmed by humans and therefore subject to error, and their persistence and speed remove some of the fairness in the market. Additionally, crypto trading bots have yet to prove that they are generally better at generating profits than human traders.
Bots can be incredibly useful, although there remains an ongoing debate about whether they should be allowed in cryptocurrency trading. However, to maximize the impact of a bot, you need to know how to use the tool. For example, you’ll need the correct accounts set up on digital currency exchanges, many of which require personally identifiable information to comply with know-your-customer (KYC) laws.
You’ll need to link your exchange accounts to these bots – which is quite a gamble if you’re giving an automated third-party program your account information and the ability to trade for you. Although you can find many stories of traders using bots with success, it is best to remember that crypto trading bots are created by humans, which requires you to trust that they have your best interests in mind and not your funds and crypto currency will not steal.
While bots can help execute orders, they are not a substitute for a solid investment strategy.
The trusted exchanges that offer trading bots may be more reliable, but again, you are trusting a program designed by humans. It is possible that there are errors in the programming that can lead to problems. If you choose a trading bot, it’s a good idea to read through the legal agreements and documentation to find out if there are guarantees or methods of getting your funds back if a bot goes awry. For example, if the bot encounters a mistake and makes a purchase when it should have made a sale, you should be notified of the action and made whole because you didn’t make the mistake.
Cryptocurrency bots may only produce marginal returns (even when they work correctly). Using a bot successfully requires an in-depth knowledge of the digital currency markets and an excellent supporting investment plan. For some traders, a bot can be a useful tool to help their cryptocurrency trading. But for others, by the time they’ve done the work to prepare themselves to adequately use a bot, 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. Anyway, you will need to be very familiar with trading strategies and the crypto 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 are advertised to be.
How Safe Are Crypto Trading Bots?
Crypto trading is risky – adding a computer program that trades while you’re not looking or unaware adds even more risk. If you enjoy the added risks and can afford to lose the funds you have placed under its control, bots can be a fun way to trade. However, for most traders and investors, bots are very risky.
Can you make a living from trading bots?
It is entirely possible for a trading bot to generate enough returns to live off of. However, it is also likely that a bot can lose everything. Crypto trading bots are risky to use in an already risky market.
Are Crypto Trading Bots Legit?
If you are allowed to trade crypto in your country, crypto trading bots must be legal. However, there are always restrictions, such as national laws or exchange rules that restrict certain types of trades or practices. Make sure you are familiar with the laws in your area before starting to use a crypto trading bot.
The Bottom Line
Crypto trading bots automate cryptocurrency trading and can be programmed to trade 24 hours a day, seven days a week. There are several advantages to using these bots, but there are just as many disadvantages. If you are considering using a bot to trade crypto, make sure you know what it can do and fully understand the crypto market and trading strategies. You’re also giving a program created by someone you don’t know access to your money and trading accounts, so make sure you do your research before committing to using one.
The comments, opinions and analyzes expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more information.
As of the date this article was written, the author owns BTC, XRP, ETH and ADA.
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