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Everything you need to know about Crypto Trading Bots

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Cryptocurrencies are known for being extremely volatile, and prices fluctuate drastically even in the space of minutes. Investors have the opportunity to participate in cryptocurrency trading around the world and at any time of the day. The combined effect of these factors limits the effectiveness of human cryptocurrency trading in a lot of ways.

Investors, in many cases, are unable to react quickly enough to changes in the price to achieve the optimal trades. Investors can not dedicate as much time to the cryptocurrency markets as necessary to always achieve the best trades. That would require round-the-clock monitoring of cryptocurrency exchanges all over the globe. This is where crypto trading bots get into the picture. They are nothing but automated tools that conduct trades and execute transactions on behalf of human investors.

What Are Crypto Trading Bots?

Crypto trading bots are a set of programs designed to automate cryptocurrency trading on your behalf. Typically, The investor/trader will have to pay attention to market statistics that play a crucial role in practicing trading and then pick which cryptocurrency to buy/sell and at what time. Crypto trading bots can easily automate the analysis and interpretation of market statistics. They can gather market data, interpret it, calculate the potential market risk, and execute buying/selling cryptocurrency assets. 

It’s like hiring an expert to do crypto trading for you while you can sit back and watch the profit grow. For example, you can set up a crypto trading bot to purchase more Bitcoin when the price goes lower than a specific limit. Crypto trading bots can often save you a lot of time and are more cost-effective than hiring human experts.

How Bots Work

Investors seek out the crypto trading bots that will be most useful for them and then download the code from a developer. Many bots have user fees, some of which can be quite steep. Each bot has different requirements in terms of software and hardware. In order to maximize the impact of a bot, an investor must know how to best utilize the tool.

For instance, investors must have the proper accounts set up across digital currency exchanges and must stock those accounts with cryptocurrency holdings. In many cases, they must still make investment decisions such as when to buy or sell. What a crypto bot tends not to be is a get-rich-quick solution for an investor not looking to put in the time and effort necessary for success.

Generally, most crypto trading bots have the following key components:

  • Market Data Analysis

This module will save raw market data from different sources, interpret it and decide whether to buy/sell a specific cryptocurrency asset. Most of the bots allow users to customize which types of data go into the signal generator sector to get refined results.

  • Market Risk Prediction

This module is a critical aspect of a crypto trading bot. Like the previous one, this one too uses market data to calculate the potential risk in the market. Based on that information, the bot will decide how much to invest or trade. 

  • Buying/Selling the Assets

This module of the crypto trading bot uses APIs to buy or sell the cryptocurrency asset strategically. Sometimes, you might want to avoid buying tokens in bulk, and during certain situations, immediate purchases could be the best choice. The Execution module takes care of such aspects.

Types of Bots

There are many varieties of crypto trading bots. One of the most popular ones is the arbitrage bot. Arbitrage crypto trading bots are tools that examine prices across exchanges and accordingly make trades in order to take advantage of variations. Because the price of a cryptocurrency tends to vary somewhat from exchange to exchange, bots that can move quickly enough can beat exchanges that are delayed in updating their prices.

Few other types of crypto trading bots use historical price data to test out trading strategies, offering investors a helping hand theoretically. And there are still other crypto trading bots programmed to execute trades at particular signals such as trading volume or price.

Advantages of Crypto Trading Bots

Following are some of the core characteristics and advantages of crypto trading bots:

  • More Powerful

There is a specific limit to the amount of data a human trader can process at a time. Even if all the data is processed, it is tough to seek insights based on that data. Crypto trading bots can easily handle bulks of data and arrive at plausible conclusions.

  • Efficient

Trading cryptocurrency assets using a crypto trading bot is always considered more efficient. You don’t have to worry about delays and, most importantly, human errors. As long as the bot receives the correct data and is working on suitable algorithms, it can trade assets with a better chance of profit. An added advantage is that these bots can work 24*7.

  • Emotionless

A crypto trading bot takes every single decision based on the perceived. Unlike humans, it doesn’t have a fear of loss or greed of profit. Experienced traders may make rational decisions by overpowering their emotions, but that may not always be the case with everybody, especially beginners. On the other hand, a crypto trading bot always keeps emotion out of the equation.

Disadvantages of Crypto Trading Bots

Crypto trading bots are not exactly perfect when dealing with a highly unpredictable market. Situations like the ongoing Covid-19 pandemic can have an unexpected impact on the market, and you cannot always predict how these events impact the economy. You need a better, psychologically-driven strategy to keep racking up the profit. 

Since crypto trading bots do not possess the capability to do so, that is one area where you need to trust your instincts. Programming errors, too, can impact the efficiency of crypto trading bots. You must also be extra careful while determining the bot’s conditions and its actions, especially when programming your crypto trading bot from scratch.

You should remember that crypto trading bots primarily help in providing only marginal returns. It is crucial to have a deep knowledge of the digital currency markets and an excellent supporting investment plan for the successful utilization of a crypto trading bot. 

For some investors, a bot can be a useful tool to aid in their cryptocurrency trading. While for others, though, by the time they've done the work to prepare themselves to adequately use a crypto trading bot, they may no longer require its services.

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Nischal Shetty

Nischal Shetty

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WazirX

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Mumbai

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This post is from a series of posts in the group:

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