Bitcoin—the first digital asset to reach a mainstream audience—has a wildly volatile price range. While some think that the digital currency’s price will have to stabilize before it becomes an attractive investment asset, the price fluctuations have already made Bitcoin an attractive asset for day traders looking for quick profits.
Unlike traditional stock markets, cryptocurrency exchanges run 24/7, and prices rise and fall in the span of a few minutes. Users who keep a close eye on the markets are able to take advantage of the fluctuations by buying and selling Bitcoin at the right time. But even for the more experienced traders, following the global Bitcoin market round-the-clock isn’t easy.
Bitcoin trading bots are automated softwares that conduct market analysis and trades on behalf of Bitcoin owners. Cryptocurrency trading bots can easily and rapidly compare prices across many exchanges, find optimal trading conditions, and execute transactions without human input.
We prepared a guide to explain how Bitcoin trading bots work and what they can do for cryptocurrency traders. Let’s dive right in.
How Do Cryptocurrency Trading Bots Work?
Cryptocurrency trading bots automate the trading process for users by offering algorithmic trading services. Simply put, algorithms interpret market data in order to trigger automatic transactions when the right market conditions are met.
In order to use a cryptocurrency trading bot, you need to download its code from the developer. While there are some free crypto trading bots, the best ones usually charge a certain amount in subscription fees. Before downloading a Bitcoin trading bot, you should make sure it is a trading bot that will work with your hardware and your operating system, not to mention the exchanges you plan to trade on.
You can use Bitcoin trading bots on a number of exchange platforms such as Binance, Bitfinex, Kraken, Coinbase Pro, and Bittrex. You need to decide which platforms you want to use and then deposit funds to those exchange accounts so that the bot can trade.
Keep in mind that you will still need an investment strategy and an understanding of how cryptocurrency markets work in order to use Bitcoin trading bots. A bot can be a useful tool if you know how to adjust your parameters according to changing market conditions, but it won’t make a profit if you don’t know how to use it. You will still need an investment strategy even if you are using a cryptocurrency trading bot.
What Do Crypto Trading Bots Do?
Crypto trading bots monitor exchanges to gather crypto market data and interpret these numbers according to technical analysis tools. They can be used for portfolio management.
There are different types of cryptocurrency trading bots that use different trading strategies. We will explore some of the most popular types to give you an idea of how a trading bot can enhance your trading experience.
Buy and sell prices differ across exchanges. Arbitrage bots track Bitcoin prices across several exchanges and make profitable transactions on your behalf.
Market Making Bots
These bots can be used to place automatic buy and sell orders on digital assets. Let’s say the price of 1 BTC is 10,000 USD. The bot can place a buy order for 9,500 USD and a sell order for 10,500 USD. If or when both orders are filled, the trader makes a profit of 1,000 USD.
Algorithmic Trading Bots
These bots use technical analysis tools in order to create parameters for buy and sell orders. Users can select market indicators they consider meaningful and authorize parameters for transactions.
Portfolio Management Bots
These bots automate portfolio management by rebalancing your portfolios when the prices fluctuate. If a digital asset in your portfolio gains value, it can sell the digital asset and invest in a low-performing asset to balance your accounts.
Technical Trading Bots
These bots use indicators for analysis in order to model future price fluctuations and make a profit.
Automated Crypto Trading Bots
Automated crypto trading bots implement algorithms in order to make maximum profits. These bots buy and sell non-stop within the user-given limits, and employ stop-loss and take-profit strategies to protect the funds.
What Do Cryptotraders Need to Know in Order to Use Trading Bots?
You need to understand the basic components of trading bots before jumping in the deep end. Most trading bots share a set of common features you should be familiar with. We offer a simple outline for beginners on how to use trading bots.
Backtesting is the most crucial step in using a cryptocurrency bot, whether you use a ready-made bot or you are customizing an open-source bot according to your preferences. Backtesting simply means taking the trading strategy or model that the bot uses and applying it to data from a previous period to see how it would have performed. Common sense tells us that if a strategy has worked before, it can work again in the future.
When performing a backtest, it is important to pick a relevant time period that reflects all kinds of market conditions and a dataset representative of the assets that both gained and lost value. Otherwise, your backtest could be heavily biased toward false positives.
Most trading bot platforms support backtesting.
Implement Different Strategies
Don’t be satisfied with backtesting one strategy and don’t just run with it once it shows positive results. Run scenarios with a couple of different strategies using different indicators or different calculation logic to see how they perform against each other.
Try Paper Trading
Paper trading is also known as forward performance testing. This allows you to run a simulation of your own strategies in a live market without actually making any transactions. Run a live trading simulation that includes all trade entries and exits in your evaluation to see if the strategy is sound.
What Are Some Popular Crypto Trading Bots?
There are many crypto trading bots on the market, but it is important to pick a trading bot that suits your needs and investment strategies. We compiled a list of some popular Bitcoin trading bots and explained how they work so you can make an informed decision.
3Commas is a widely used technical trading bot that is supported on most popular exchanges. It tracks more than 20 key indicators to create trading strategies and assess risks. You don’t need to download a program since it comes with a user-friendly web interface that runs on the cloud. 3Commas offers a regular subscription option for $25/month and an enhanced version with more indicators for $84/month.
Cryptohopper is a free and popular trading bot that is compatible with iOS and Android devices. It is an arbitrage bot for popular digital currencies like Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC). You can use it to manage your accounts across platforms like Coinbase Pro, Bittrex, Kucoin, Bitfinex, and a few others. Cryptohopper has a user-friendly interface and provides real-time performance reports. If you want to explore what Bitcoin trading bots could offer before making an investment, this is a good place to start.
Haasonline is a great market-making trading bot that has been around since 2015. Haasbot allows you to use up to 10 bots and access 20 indicators to create trading strategies. This beginner-friendly platform offers a tutorial and it’s supported by all the popular exchanges. You can subscribe to this cloud-based platform with a 3-month, a 6-month, or a 12-month package, and pay with BTC.
Trality is one of the most popular platforms to create algorithmic trading bots. It is suitable for both beginners and pros. Coders can use its Python-based code editor and API to pick the technical indicators they wish to use, while non-coders can use Rule Builder in order to simply drag and drop indicators and strategies they prefer in order to build their custom bots. Trality offers statistical analysis that goes beyond tracking indicators, which makes it a very powerful trading bot platform. It is supported on all popular exchanges. Its flexible pricing model comes with a free option for beginners and several packages for more experienced traders.
Shrimpy is a portfolio management platform that offers automated long-term trading strategies. Its main goal is to help you pick an investment strategy and automate trades in order to rebalance your portfolio in line with a specific ratio. It is a social trading platform, which means it allows you to view, copy, and compare leading traders’ portfolio management strategies.
Bitsgap is an automated crypto trading bot designed to buy at low prices and sell at high prices non-stop. Traders define limits for orders, and Bitsgap continuously files buy and sell orders until the prices are out of the given limits. You can monitor the automated trades and test your strategy beforehand to see how it performs.
A Few Words Before You Go…
Popular crypto trading bots have backtesting, paper testing, and scheduled automation functions, and they also usually provide users with easy-to-use templates for developing trade strategies. They can track and monitor a digital asset’s trading history, trading volume, and liquidity.
Crypto trading bots can help you trade more efficiently, but we suggest that you learn how cryptocurrency markets work before taking your chances. Crypto trading bots can automate repetitive tasks and help you put your strategy into work more effectively, but they are not magic wands.
Bitcoin trading bots will be most helpful to day traders who have developed investment and trading strategies on their own but need some time away from monitoring the screens all the time. Even if they are not magic, crypto trading bots can help you get a good night’s sleep by automating trading. If your bot is armed with the right information and strategy, its efficiency will help you profit off of Bitcoin’s price volatility.