How do crypto trading bots work and are they worth it?
What are crypto trading bots?
Crypto trading bots are computer programs that work based on given instructions regarding cryptocurrency trading activities – they execute trades on your behalf when a certain price target has been reached. The main goal of the automated crypto trading bots is to help anyone achieve better results at their trading game 24/7. Yes, these tools will continue working even while you’re sleeping. Thanks to the crypto trading bots, you won’t miss out on any crypto trading opportunities just because you need to take a break from staring at the computer screen. This brief explanation contains the essence of crypto trading bots. However, there are different types of them, which perform specific functions and are therefore used for completing various trading strategies.
How do crypto trading bots work?
All types of cryptocurrency trading bots have one thing in common, and it is that, in order to work, they have to be connected to a cryptocurrency exchange account using a so-called API (Application Programming Interface) that can be easily done. This enables the trading bot to have access to your account and, therefore, trade on it. Although allowing a computer program to be in charge of your funds may seem a bit sketchy, you don’t have to worry too much about it. Most legit crypto trading bots allow you to set API permissions, which regulate the work of certain API keys – you can set them to only place orders but never to withdraw.
Essentially, a regular crypto trading bot can complete the following functions:
- write orders;
- buy and sell crypto coins;
- evaluate the current trading opportunities;
- predict the future state of the market;
Types of crypto trading bots
Trading bots function differently based on their application in the trading process and strategy formulation. When choosing a crypto trading bot, you should always consider the type of investments you want to make and which strategy would be most beneficial in that case. Always do your research before you start using any trading bot, and test it before allowing this software to have access to your funds.
The arbitrage bot is meant to buy a certain cryptocurrency on an exchange, in which it has a low price, and then sell it on a different exchange platform, which has a higher price. Thanks to the algorithm of this specific trading bot and its ability to monitor the price ranges of a certain cryptocurrency on different exchanges, the trader is able to generate profits. Based on the extensive testing that we have done with different crypto trading bots, strategies, and settings, the arbitrage bots seem to be the safest bet, even though they usually provide the lowest profit. The other bots that you will find below offer a chance of bigger profits, but this comes with a higher risk.
Coin lending bots
If you’re interested in lending your crypto coins to other people, then these types of crypto bots are exactly what you would need to amp up your game. Coin lending bots are programmed to find the trader who wants to take your coins as a loan and also pay you the optimal interest for doing so.
Trend trading bots
Trend trading bots help determine in which direction the value of the asset is headed. Capturing this momentum makes trading easier because you can then take advantage of the up-and-downrends of a particular cryptocurrency.
Market making bots
These types of bots optimize the work of market makers by making both buy and sell orders on behalf of the market maker, which would create liquidity in that market. The main goal here is to create profit from the difference between the buy and sell prices.
Pros and Cons of Using Trading Bots
The initial idea behind crypto trading bots offers an unrealistic expectation of secure profit making possibilities. However, if these pieces of software were really that perfect, the very people who created them probably wouldn’t have made them available for public use.
The very best crypto trading bots work in advantage of the user, make no mistakes in calculating trading prospects and guarantee great profits. And although this sounds like a failure-free recipe for success, it shouldn’t come as a surprise that most crypto trading bots cannot turn you into an overnight crypto millionaire.
The pros of crypto trading bots are:
- They provide advanced assistance by taking into account diverse market data, which would result in making worthwhile investments.
- You cannot work 24/7 all year round, but these tools sure can. That’s why they don’t miss out on important market changes.
- In order to use them, you don’t need to buy any professional setup, but you just need to have a regular computer.
- Allow you to assess different trading strategies based on the provided data.
- Can collect the trading history of a certain cryptocurrency and determine how its value could change in the future.
The cons of crypto bots are:
- There are many scam bots which would promise guaranteed profits and would make you believe you can maximize your funds without any problem. As a beginner, we recommend you to go for some of the most popular crypto trading bots.
- You have to constantly monitor the trends on the market and, therefore, change the set of instructions to the bot, which would suit your current goals.
- You still need to have a basic understanding of how the trading market works in order not to choose the wrong type of bot.
- If you want to use them, your funds have to be kept on an exchange, which could be less safe than storing them in a cold wallet.
Are crypto trading bots legal?
Yes, cryptocurrency trading bots are legal, and their use is welcomed by many crypto exchange platforms. However, there could be certain crypto trading brokers that do not let traders use them, which is nothing to be worried about because very few have such restrictions.
Are crypto trading bots worth it?
It is important to note that the efficiency of these bots mainly depends on the set of instructions the user gives them, so in that way, their performance is closely connected to the way you configure them. In order to learn the best way you can program the bot of your choice, it is suggested to find free online guides, which will help you navigate all the possibilities these tools can offer.
Whether these automated tools are worth it or not would depend on how much experience you have with trading crypto. If you have been operating in this field for quite some time and have, therefore, figured out which trading strategy works best in your interest, then this type of automated trading assistance won’t be that detrimental to the improvement of your performance on the crypto market.
Beginner crypto traders may find cryptocurrency trading bots more helpful, especially due to their diverse functions and even educational purposes. They could act as a guide to those who have yet to figure out the right trading strategy for their goals. Having a closer look into the inner workings of the crypto markets would help anyone avoid unreasonable and risky trading decisions.
With all that being said, if you believe that trading bots will elevate your trading experience, then it wouldn’t hurt to try them out. But always make sure that you take advantage of the test trial and examine closely how the bot would perform with smaller funds, which are best kept on a spare exchange account of yours.
*The article gives an overview of a topic that can serve only educational purposes!
Zornitsa is the Editor-in-chief at Coinlabz. She is involved in researching the impact of blockchain technology and the way crypto is transforming peoples’ perceptions of finances.