If you must know anything about cryptocurrencies, it is the fact that they are volatile, actually, extremely volatile. Their prices fluctuate dramatically, sometimes in just a matter of minutes. The crypto market is open 24/7. Because the human/manual systems are limited in some ways, such as speed and relaying changes in prices as they happen, you can lose numerous chances of making a profit. That can also make you lose your investment quite fast.
In addition, you might not be able to dedicate too much time reading statistical data and following the cryptocurrency market changes. That would mean round-the-clock monitoring of all cryptocurrency exchanges across the globe. This can make the process tedious, and you’re still not guaranteed to make a good deal when it’s available.
There’s also the issue of the entry of tokenization of assets into crypto trading exchanges. This is where trading bots come into play. These are automated trading tools that help you make trades and execute the most suitable transactions on your behalf.
What are crypto trading bots?
These are programs that can automatically create and submit buy and sell orders on your behalf on crypto exchanges. They follow a set of rules in a pre-determined strategy. As stated before, in manual/human trading, you need to keep tabs on the market statistics to pick the crypto to buy or sell and the time to do it. With a crypto trading bot, you automate the entire process of market data analysis and interpretation.
They collect crypto market statistics, interpret, calculate risks, evaluate a good deal and execute a transaction on your behalf. It’s the same way you can hire a broker to trade on your behalf while you relax and wait for profits. The most significant benefit that trading bots give you is time and the ability to analyse, find a good deal, and execute the transaction fast. You can use crypto trading bots in crypto arbitrage and yield farming crypto.
How crypto bots work
As an investor, you’ll need to work with a blockchain development company for a custom solution or look for a trading bot and get the code from the bot developer. Most bots charge user fees that vary from one bot to another, with some charging relatively high fees. They are all different and come with various requirements for both hardware and software to use. If you want to get the most, you need to know how to utilise this trading tool.
But first, you need to have correctly set up the accounts in various digital exchange platforms and have the appropriate crypto holdings in those accounts. You still need to put some time into deciding on when to buy or sell and to change your trading strategy.
The critical components found in crypto trading bots are as follows:
- Market data analysis: The module saves market data from various sources, interpret and determines if it needs to buy or sell a particular crypto asset. You can customise the data you need to analyse in the signal generator for more refined results in most bots.
- Prediction of market risk: This is a critical feature in a trading bot, and it too utilises market statistics to assess the possible risk in a market. That analysis determines how much the bot safely trades or invests on your behalf.
- Execution: This feature uses API, and it allows the bot to buy or sell crypto assets strategically. When you don’t want bulk buying of tokens in some situations, instant purchases are the best option. The execution feature takes care of this trading aspect.
Types of crypto bots
Trading bots come in various varieties, with the most common being arbitrage crypto trading. Arbitrage trading crypto bots are tools that you can use to examine crypto prices across crypto exchanges and make trades by taking advantage of the price variations. This is because cryptocurrency prices tend to vary from one exchange to another. Trading bots can act quickly to leverage this and take advantage of exchanges that have delayed updating their prices.
You can also use trading bots in yield farming, putting your cryptocurrency to work to generate more cryptocurrency. It uses decentralised finance (De-Fi) protocol liquidity pool where you deposit cryptocurrency as a lender. You earn more on what you deposited and a reward for the same. Like arbitrage, bots automate the processes by taking advantage of the most suitable deals while mitigating risks.
You can set trading bots to use historical data, while you can set others to complete trades based on prices or trading volume.
Advantages of cryptocurrency trading bots
Cryptocurrency trading bots have some significant benefits to investors. Here are a few of them:
- Better market analysis: As a human trader, you are limited in the amount of data you can process at a time and the amount of time you can put into trading. Crypto trading bots have a massive capacity to handle data in bulk and reach reasonable conclusions instantly.
- Efficiency: It’s more efficient than a human mind that is prone to errors and confusion. When you input the correct data, you have a better chance of making a profit. It also works 24/7.
- Emotionless: Trading bots make decisions based on data, unlike human beings whose emotions such as fear or greed can inhibit the chance to make a good deal or result in massive losses.
Disadvantages of cryptocurrency trading bots
The downside of crypto trading bots is that they rely on human strategy and pre-defined conditions and actions to work. Sometimes, programming errors can impact their efficiency.
You need to keep in mind that trading bots are only to help boost marginal returns. You need to have an in-depth knowledge of cryptocurrency, exchanges, and markets. Another crucial thing you need to have is an excellent investment plan to enable you to utilise the crypto trading bot effectively and successfully. A trading bot is a helpful tool in crypto trading when you know how to use it to your advantage.