Investing in crypto can be a rollercoaster of emotions. Unlike the stock market, cryptocurrencies are traded 24/7 and have no emergency measures to prevent panic selling, like a circuit breaker. Additionally, cryptocurrencies are known for their volatility, making it nearly impossible for a human to catch all the best investment opportunities.
Unless you are a fortune-teller and have an endless supply of energetic drinks, never to miss a beat of what is happening in the crypto markets, you might consider a solution to automate your investment strategy.
Well, I have some good news for you. Trading bots can be your loyal companion in your investment endeavors and help you overcome many of the drawbacks you might encounter in the crypto wild west. But, as with most things in life, that is not so simple. Before jumping blindly into the world of trading bots, let's first understand what bots can actually do for you and how to use them properly.
What are trading bots?
In short, trading bots are computer programs that trade on your behalf with a given set of specific instructions. For example, you can configure a bot to buy or sell X amount of Bitcoin at a certain price. Once the price hits that target, the crypto trading bot will execute the specified order.
In this sense, crypto trading bots can be seen as personal assistants who will monitor the market 24/7 and only take action when the prices match the instructions it was programmed to follow. To do that, bots need to be connected to a crypto exchange via an API (Application Programming Interface), which enables them to place trades programmatically at the exchange. Cool, isn't it? But there is more 😎
Pros of using trading bots
Not affected by emotions and biases
Emotions are great when you are out having a good time and enjoying life, but it is better to keep them away from your investments. No matter how crazy the markets are, trading bots will remain unaffected and execute their strategy no matter what, making you less susceptible to FOMO (fear of missing out) or panic selling 🤯
Bots never sleep
When it comes to monitoring cryptocurrencies, humans are at a critical disadvantage. You need to sleep, and the markets don't care about your chronological schedule (sorry). Crypto is traded 24/7, and your well-deserved nap might cost you unique investment opportunities. The good news is that our algorithmic buddies can monitor the markets at all times and execute orders on our behalf, so you can literally make money while sleeping 😉
Backtest your strategy
Wouldn't it be nice if you could test your investment strategies before committing real money to them? Well, trading bots allow you to do exactly that. A bot can take your strategy, apply it to all the historical crypto price data and then predict how the algorithm would respond from the perspective of profit and loss outcome 📈
I challenge you to trade faster than a bot. Would you be able to do that? Probably not. Bots can instantly execute orders, and, in volatile markets such as crypto, a mere instant might be the difference between a hefty profit or a huge loss 💰⏳💸
Monitoring multiple exchanges to find the best trading opportunities is time-consuming and inefficient. Once again, bots can easily solve this problem for you. Trading bots can monitor and execute trades across different exchanges. Additionally, they can process vast amounts of data and identify great opportunities before humans can 🧘♂️
Cons of using trading bots
Bots require monitoring
Turn on the bot, stretch your legs, and wait for the money to start flowing, right? Not really. Contrary to what some might think, trading bots are not magical money machines. A bot can indeed execute a trading strategy on your behalf. However, you still need to closely monitor your strategy performance and adjust it when necessary 🧙♂️
Not all bots are created equal
The efficacy of a bot in executing a trading strategy is highly dependent on how well it was coded. Unfortunately, there are many bots out there that are quite poorly coded - to the point of being unable to execute even one profitable trade. On top of that, trading bots can have different features and be optimized for specific strategies, so it's essential to know if your bot of choice fits appropriately to your desired use case 👨💻
Beware of scams
Not everyone has your best interests in mind. Scammers are increasingly targeting inexperienced traders with tales about incredibly sophisticated trading bots, which, according to them, guarantee mind-blowing profits and zero losses. Despite all their amazing features, bots still can't ensure that you will always profit from your trades, and you should be skeptical of anyone saying otherwise. Looking for information and reading from credible sources are your best defenses from falling prey to scammers 🕵️♂️
Types of crypto trading bots
Crypto bots can differ in what they are designed to accomplish. Two of the most popular types are market-maker and arbitrage bots.
Market-making bots are programmed to provide liquidity to new exchanges and newly listed coins that just had their ICO (Initial Coin Offering). These markets have a big spread because of the lack of liquidity, which creates an investment opportunity for those willing to "make the market" by supplying the necessary liquidity to the other market participants.
Arbitrage bots aim at capitalizing on market inefficiencies. For example, the real-time price of Bitcoin can vary slightly across different exchanges. This gives the bot a window of opportunity to exploit this discrepancy by executing trades before the exchanges update their prices.
In the end, the profitability of the bot depends on the foundations of your investment strategy and the accuracy of the software behind the trading bot.
Are crypto trading bots legal?
Bot trading is entirely legal in cryptocurrency markets. However, you should be aware that activities like pump and dump are still illegal, and using bots to do that is, naturally, not allowed.
Not only are trading bots legal, but they are often welcome. Market-making bots, for example, provide the necessary liquidity to a market, benefiting all the other market participants as a result.
Cryptocurrency markets are not easy on human investors, who usually find themselves at a critical disadvantage. Trading bots are a powerful ally that, if used correctly, can make trading more profitable and efficient.
But not everything is perfect. Understanding the advantages and drawbacks of trading bots is vital to avoid the pitfalls that inexperienced investors usually fall for.