How bot trading influences the crypto market
From factory floors to trading stocks, automation is the way of the 21st century. For anyone interested in crypto trading, a trading bot can be a great way to automate a profitable strategy and make some passive income on the side.
This article will cover cryptocurrency bots, how they work, whether trade bots are profitable, and the disadvantages of using cryptocurrency bots.
Crypto Trading Bots: Are they Worth it?
There are two ways to profit from the cryptocurrency market. Long-term investors buy coins when they’re cheap and sell them when they’re expensive. These investors usually hold coins for a year or more.
On the other hand, traders try to profit from short-term moves in the market, both up and down. Traders usually only hold a coin for a week or two and the traders with the shortest timeframes may only hold a coin for a few days at the most.
For cryptocurrency bots to be worth it, a trader needs to employ a strategy that can earn him or her more than what they would earn holding a cryptocurrency (I.e. long-term investing).
Because of these variabilities, it’s impossible to make a generalized statement about whether trade bots are worth it. Traders have to look at the risk adjusted returns that they can make with cryptocurrency bots, compare it to what they could make with a long-term strategy, and then calculate whether bots are worth it or not.
Crypto trading bot advantages
There are a couple of great advantages associated with cryptocurrency bots.
- Generate alpha. As mentioned in the previous section, a profitable trading bot can generate alpha over and above what an investor can earn by buying and holding a coin.
- Inexpensive to run. Once you’ve bought and set up a crypto bot it’s virtually free to run. Besides the price of the bot, the biggest cost will typically be trading fees on the exchange.
- Speed. Trading bots can capitalize on opportunities that a human trader can’t catch. Trading bots also operate 24/7, they don’t have downtime the way a human trader does. Finally, cryptocurrency bots can potentially execute dozens or hundreds of trades in a minute, far more than any human trader can process.
- Lack of emotion. Trade bots will execute whatever strategy they are programmed with, they aren’t affected by fear or greed. For example, it can be hard for a trader to buy Bitcoin after it goes down 20% in 24 hours. That’s an emotionally difficult decision but a trade bot can make it since they’re unaffected by emotion. Whatever the strategy is, that’s what a bot will do.
Crypto trading bot disadvantages
If cryptocurrency bots were pure money-making machines, everyone would use them. However, despite their benefits, there are some distinct disadvantages associated with trade bots.
- Unprofitable strategies. If you’re not careful, a trading bot with a bad strategy can quickly lose a lot of money. You can’t set up a bot and forget about it, you need to carefully monitor its activities to ensure that it remains profitable.
- Trading fees and taxes. Every time you make a crypto trade you have to pay taxes on the gains. Trading fees can also add up since they eat into a trader’s margins. So for cryptocurrency bots to be profitable they have to make enough money to cover taxes and trading fees.
- Strategies can stop working. A trading strategy that’s worked for months can stop working at any point. If the bot continues to run this strategy it could lose you a lot of money before you notice the problem.
The Best Crypto Trading Bots
Listing the best trading bots is an entire article within itself. Rather than list the bots, instead we can recommend an article written by Gaurav Agrawal, the editor for Coinmonks.
The article is called: Crypto Trading Bots in 2021 | Best 16 Bitcoin Trading Bot and it lists some of the best crypto trading bots currently available. A quick Google search will also reveal lots more information about the best cryptocurrency bots that you can buy.
How profitable is automated bitcoin trading?
Automated Bitcoin trading can be very profitable if you know what you’re doing. More specifically, cryptocurrency bots can be profitable if you can program them with a proprietary strategy. For example, there are some trade bots that you can download for free. These crypto bots come with standard strategies that are unlikely to be profitable.
If you want to make a profit with cryptocurrency bots you have to ask: what’s my edge? How am I going to use this bot to implement a strategy that can beat the market?
Profitability can also depend on leverage. If you find a winning strategy, and apply leverage, you can earn more profits. However, leverage is risky and can lead to fast losses. It takes an experienced trader to understand how to profitably use leverage with a trading bot.
The Different Types of Crypto Trading Bots
There are two main types of cryptocurrency bots that traders can use to automate their strategies. There are variations on these bots, however, for those just getting into the bot market these are the two types of trade bots that are the easiest to set up.
1. Mean-reversion cryptocurrency bots
A mean-reversion bot takes out a trade when it believes that the price of Bitcoin (or any other cryptocurrency) has gone too high or too low. The reason this strategy works is that markets never go straight up. Even in a massive Bitcoin bull market, it’s normal to see 30% drawdowns.
Based on mean-reversion bot, here’s a strategy that a trader could program into a bot.
Anytime Bitcoin goes up 50% or more within 30 days, and then falls by 8% or more within 5 days, take out a short position. Close the short position once Bitcoin has fallen 25% from the peak.
Of course, all of these numbers can be adjusted. Traders will have to test different strategies to find the one that’s consistently profitable.
2. Momentum trade bots
A momentum bot takes out a long position in a coin that’s consistently going up, or takes out a short position on a coin that’s going down.
For example, if BTC goes up 7% in 24 hours, a momentum trade bot will take out a long position. It may hold that position for as long as BTC continues to rise. However, as soon as BTC goes down 5% or more in 24 hours, it may decide to take profits and sell.
Again, these numbers are arbitrary. A trader can program their cryptocurrency bots as they see fit.
What are the positive effects of bots on the cryptocurrency market?
There are a couple of ways that cryptocurrency bots affect the market.
1. Price cushion. Trade bots that employ the mean reversion strategy will buy coins that have fallen to a lower level. This can help create a price cushion that can slow down a falling market.
For example, if thousands of automated cryptocurrency bots start buying BTC as soon as it’s down 20%, that can help to create a price floor to prop up Bitcoin’s valuation.
2. Taking prices higher. In the previous section, we explained how momentum trade bots work. As prices rise, the bots buy more of that coin. This self-perpetuating cycle can drive the price of Bitcoin higher and higher.
3. More market liquidity. Liquidity is the lifeblood of a market. Why is Tether so popular despite its shady past? Tether USDT is popular because it’s extremely liquid and on any given day Tether trades billions or tens of billions of dollars in volume.
Cryptocurrency bots also add liquidity to the market. Since bots function 24/7, and can make trades in less than a second, they add more buy and sell orders to exchanges. More orders benefit the market as a whole.
Best practices for finding successful trading bots
Before you buy any trade bots from someone or from a professional trading company, here are three questions that are worth asking:
1. What is the firm’s track record? Before you buy trade bots from a company you should investigate their track record. Has the company been producing cryptocurrency bots for years, or did they just launch?
The longer a company has been in business, the higher the chance that their bots are profitable.
2. Does the bot come with a proprietary algorithm? A good algorithm is the difference between making a profit and losing money. Trading algorithms for cryptocurrency bots don’t work if thousands of traders are using the same strategy.
That’s why it’s important to find trade bots that come with proprietary algorithms. You’ll probably have to pay a lot more for this bot, but the edge it gives you in markets should help you to make a good profit in the long run.
3. Can you get support after the purchase? Crypto bots aren’t always easy to set up and maintain, especially if you don’t have programming experience. That’s why it’s important to buy trade bots from companies that provide ongoing support to help you keep your bot up and running.
Bots vs. Investing
What it really comes down to is this: cryptocurrency bots can be a profitable way to make money in the markets if:
- You have some programming experience and can customize your bots
- Have the patience to find a winning strategy
- Have enough capital and/or the ability to use leverage to make a meaningful amount of money
If you meet these three criteria, then trade bots might be just what you need to increase your crypto market profits. Otherwise, buying and holding cryptocurrency is probably the best bet.
Long-term crypto holders can do very well for themselves. If you’re not ready to deal with setting up trade bots, the investing approach is probably the best way to benefit from the meteoric rise of blockchain based assets.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.