All You Need to Know About Automated Crypto Trading


Lilah Tillman | Updated: 22-10-2021 09:31 IST | Created: 21-10-2021 10:49 IST
All You Need to Know About Automated Crypto Trading
Image Credit: Executium on Unsplash

If you're trading cryptocurrency, you know how quickly market conditions can change. Spend a weekend offline, and you might come home to find that you've lost a quarter or more of your investment. So what do you do if you want to invest in cryptocurrency, but you don't want to spend all your free time reading about the market?

One answer is to use an automated bot to do your trading for you. Automated crypto trading buys and sells cryptocurrencies based on advanced algorithms, and different bots will use different algorithms. Depending on how you set it up, your trades could be based on market indicators, asset price, or simply allocated to continuously rebalance your portfolio.

If you can find a bot that meshes with your investment goals, automated crypto trading is a great way to take advantage of the crypto market, without spending a ton of time. Here's everything you need to know about automated crypto trading, bots, and how they function.

Automated Crypto Trading Basics

The first thing you'll need to do is choose what platform you're going to trade on. Set up an account, and make a few small "test" investments to ensure you're happy with the platform. Once everything is running smoothly and you're sure you're happy, it's time to choose a trading bot.

A crypto bot is an automated crypto trading software that buys and sells your cryptocurrency based on its own internal algorithm. Most bots will simply make your transactions automatically. However, some also give you the option to get notifications when the bot recommends a trade.

The advantage of automatic trading is that there's no delay in the system. Crypto markets can move quickly, which means you need to be ready to respond to market conditions. A bot can execute trades based on what's happening in the market in real-time. Depending on the design, it doesn't need to do this on a simplistic basis. Sophisticated bots will track not just the price of a cryptocurrency, but the trading volume, buying and selling pressure, and historical price trends. These and other variables can help the bot to make a better decision, much like a human trader.

On the other hand, many people prefer to keep themselves in the loop. A bot that sends you notifications gives you the opportunity to override its decisions. Then again, you still have to remain somewhat involved in the process, which negates some of the benefits of using a bot to begin with.

Do I Need a Crypto Trading Bot?

Whether or not you should use a crypto trading bot depends first and foremost on whether you're comfortable with its strategy. Learn to understand different bots, and understand how they make their decisions, until you find one that makes sense for your goals. Another thing to keep in mind is that even the best bot doesn't provide any guarantees. If you can't afford to lose your money, you should probably be investing in something other than cryptocurrency.

That said, if you're comfortable with investing in crypto, a bot has many advantages. We've already talked about how much time they can save you. However, you can also use the same bot to invest in multiple cryptocurrencies.

Types of Cryptocurrency Trading Bots

Most crypto trading bots fall into two major categories: APIs and decentralized platforms. Here's a quick overview of each.

Crypto trading bot APIs are the type of bot you're going to see most often. These APIs are meant to work seamlessly with an existing exchange, such as Coinbase. As long as they're compatible with your trading platform, you'll be able to execute automatic trades without a ton of technical expertise.

Decentralized platforms utilize blockchain technology to trade outside of the traditional platforms. Instead of a normal account, your coins are stored on the blockchain, as part of a smart contract. Blockchain-based trading is the most secure since it's less vulnerable to being hacked. However, you also need to put more time, effort, and research into getting your bot set up.

How Do Crypto Trading Bots Work?

A full explanation of crypto trading bots could fill a large textbook. But like a car engine, they consist of a few basic parts. These are the signal generator, risk allocation, and execution. These parts may have different names in different bots, but they do more or less the same thing.

The signal generator is the part of the bot that makes predictions. It gathers information such as the price movement, trading volume, and other data, and plugs that information into an algorithm. The algorithm then decides whether to buy, sell, or stand pat. This calculation is run over and over again on a constant basis, as conditions change. Beware of bots that use weasel words like "market indicators" without explaining exactly what they mean. If you're going to pay for a bot, you should know exactly what information it's gathering, and what strategies it's using.

The risk allocation process begins when the signal generator decides whether to buy or sell. If the bot is buying, it needs to decide how much to invest, and whether or not to reallocate any other investments. If the bot is selling, it needs to know how much to sell. Should you sell all of your position, or should you get all of your money out immediately?

The execution process is the part of the bot that actually makes the trade. For larger bots, the trading may take place over the course of several smaller trades. That's because larger bots may have hundreds of clients, with large quantities of investments. If the bot tries to buy or sell that massive quantity all at once, it will be hard to get good pricing. The most effective bots will stagger their buys and sells in order to optimize pricing.

If you're going to use a bot, you need to understand how all three parts of the process work. For example, the same buy/sell algorithm might be used with different risk allocation processes. So an aggressive bot might go all-in on a certain investment, while a less aggressive bot might only invest a portion of your money. Some bots try to maintain an even balance of investment in multiple cryptocurrencies, in order to keep you diversified. Others will readily maintain an unbalanced portfolio if market conditions are ripe for it. The point is, this is where it's most important to do your research on the particular bot you're using.

Automated Crypto Trading Advantages

Before we wrap up, let's talk about the pros and cons of automated crypto trading, starting with the advantages.

Automated trading saves you time. You don't have to spend your lunch break reading financial news sites or checking the market. A bot does all the hard work for you.

Bots don't get sleep or get bored. If your strategy involves making a lot of short term trades, the repetitive tasks will eventually get tiring. A bot can trade cryptocurrency 24/7, 365 days a year.

Bots are faster than humans. Even if you're sitting at a monitor, watching the crypto market in real-time, you won't be able to execute trades as quickly as a bot. This also helps you make better trades since you won't be trading several seconds behind the market.

Bots don't have emotions. We all like to think of ourselves as savvy, rational investors. But deep down inside, we're all still a bunch of monkeys who get easily scared, anxious, or eager. A bot only cares about the algorithm.

Automated Crypto Trading Disadvantages

With all of those positives, automated crypto trading might seem like a no-brainer. That said, there are a few negatives to keep in mind.

You still need to follow your investments. Yes, the bot will watch the market and execute your trades. However, if you're not monitoring your account, you might not realize when you're actually losing money. Even with a bot, you still need to make sure the bot's strategy is working.

You still need to know what you're doing. Trading bots often rely on multiple market indicators to execute their trades. If you don't understand how your bot works, you probably shouldn't be using it.

Exchanges are less secure than wallets. Unless you're using a blockchain-based bot, your funds are going to be stored on an exchange. While major exchanges are normally safe, you never know when the next big hack might occur. A hardware wallet, on the other hand, is theoretically impossible to hack.

Conclusion

As you can see, there are a lot of factors that go into choosing the best crypto bot. Not only that but there are never any guarantees in the crypto market. No matter which bot you choose, you might still lose money. That said, you can also lose money by making your own trading decisions. If you're comfortable with a particular bot and you want to save time, it makes sense to automate your crypto trading.

(Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)

Give Feedback