Algorithmic (“algo”) trading programs and tools have helped shape traditional stock markets for decades, but for crypto traders these tools have had a relatively short lifespan by comparison.
As cryptocurrency markets are less than a decade old and still developing, there is perhaps great potential for these tools to realize success in a fashion similar to that of HFT (high-frequency trading) in financial markets.
Bots are automated, programmable systems which monitor and share information, answer queries, and perform given tasks. The employment of bots in trading can give traders more time and flexibility for other projects, reduce user error, and allow for more rapid information-processing to help traders increase profit margins.
Many of today’s bots in cryptocurrency markets offer to do the majority of work for the user. These programs monitor prices and exchange rates, send user-alerts for trending currencies and trading volumes, execute trades, and more.
For example, traders can deploy bots to buy and sell a cryptocurrency like Bitcoin or Ethereum. These bots can adhere to a ruleset programmed to buy lower from one market and sell higher in other markets, earning profit on the difference. If you have ever used an exchange, you’ve probably encountered bots doing this.
The benefits of using bots, can’t be understated in the highly volatile, immature, and rapidly developing crypto markets. Market shifts happen so quickly that if traders are not paying attention, they risk losing a lot of money.
To generate income from crypto trading, traders must constantly monitor current market trends and activity so they can act when an opportunity presents itself. Bots can help by providing up-to-date information to keep traders in the know. Think of these bots as a type of news feed or RSS for cryptocurrency updates. This is in part why we now see the boom of chat and trading bots influencing cryptocurrency trading.
What is more, these “algo” trading programs and bots provide investors access to a wide range of trading strategies. Below we will look at how bots can help with arbitrage trading and market making.
One strategy which bots have proven useful in is arbitrage trading. Simply put, this involves buying assets in one market to resell them at a higher price in another market, thus profiting on the difference.
We mentioned above that exchange platforms are currently filled with bots performing this task, typically aiming to make long trades— by buying with the intention to resell for profit. However, this is not the only form of arbitrage that can be leveraged with trading bots.
In a Wharton FinTech interview with Arthur Hayes, CEO and co-founder of leveraged bitcoin trading platform BitMEX, Hayes said investors could also profit from the difference in prices of a futures contract, an approach called futures arbitrage.
In this approach for example, he said there is profit to be made from the difference that exists between a futures contract and its underlying asset. As well as this futures strategy, Hayes elaborates on a number of other approaches to profiting from long-term crypto investment. Read the interview in its entirety here.
Another approach Hayes mentioned in his interview was market making. This approach, he said, provides “continuous buy and sell prices on a variety of spot digital currency derivatives contracts”, aiming to “capture the spread between the buy and sell price”.
Explaining it further, Petar Zivkovski, COO of the bitcoin trading platform Whaleclub, has described the practice of market making as involving not only buying but also selling—with traders placing limit orders “on both sides of the book” at or near market prices.
Ultimately, the goal with market making is to capitalize on the spread resulting from: (a) prices fluctuating over time, and (b) more and more traders’ running algo programs to automatically and continuously place orders.
Now, before discussing the numerous bots currently in use, it must said that these bots are only industry-specific tools and, as such, there remains risk for user and programmer error.
In most cases, it is the user who programs their bot to focus on certain trades and transactions. If that user has programmed their bot to focus on an unprofitable venture, the bot will nonetheless execute on that user’s mistake. This is why it is important to have experience in trading, and have an up-to-date, working knowledge of the market, rather than relying solely on a trading bot.
This means that bot-trading is not an accessible solution for every investor. Utilization of this technology still requires proper training and expertise, trader input, and a working knowledge of the market if traders want to achieve success.
Ultimately, the tool is only as valuable as the user’s view of the market and their proposed solutions.
Many of these bots require a monthly or tri-monthly subscription fee, and there are countless bots to explore. Here are some of the more popular and widely-used options available:
Haasbot: this bot is popular among cryptocurrency enthusiasts and offers to do the majority of work for its user. From monitoring prices to exchange rates to handling trading, Haasbot offers a variety of plans for different users with different market strategies. Subscriptions are paid monthly or tri-monthly in BTC.
Tradewave: this programmable platform allows traders to implement their own market strategies and algorithms to define the bot’s ruleset. Users create their own “strategies” to influence system decisions and actions. Entry-level subscriptions start at 14 USD monthly.
Zenbot: this command-line trading bot is unique to the market as it allows for high-frequency trading, which most competitors do not. It utilizes an open-source system as well, so the code can be modified or updated by anyone.
Gunbot: this is another automated crypto trading bot which offers users customizable strategies to fit their individual trading style. Gunbot runs with many of the major exchanges and offers a lifetime license for a one-time payment: with standard, pro, and ultimate edition subscription plans.
Cryptotrader: this automated system utilizes cloud computing so users needn’t install any software or programs. Compared to the bots mentioned above, Cryptotrader is still in its infant-stages, making it perhaps lesser-known than other trading bots.
Gekko: this lightweight open-source platform can be found on Github and is quite minimal by design. It cannot handle high-frequency or arbitrage trading, so it is more ideal for basic trading.
Intelligent Trading Bot: our very own trading bot provides traders with trading insights to better take advantage of upside movement and manage downside risk. With real-time notifications, our platform monitors thousands of current data points. It identifies opportunities through the use of machine learning algorithms and technical analysis to provide actionable alerts that can be traded on. Later this year, auto-trading functionality will be available.
The influence of bots in this area cannot be understated; bots not only make the entire crypto space more competitive, but they also contribute to the cryptocurrency industry boom by providing liquidity for buyers and sellers. Market makers are serving an important role in this, creating both buy and sell orders and ultimately moving the market back and forth.
As demand for more accurate and complex “algo” trading programs and bots is driven by investors and traders alike, we will undoubtedly see further development and widespread adoption of new trading technologies in the near future.
Essentially, these tools aim to provide traders with all of the resources necessary to be active and successful, but it is important to keep in mind that these bots and programs alone are not enough to realize success. While bot-assistance does help in automating the process and making it simpler and faster-paced for traders, ultimately, individual success still depends on a working knowledge of cryptocurrency and the market.
While many investors are keen to leverage crypto bots to increase profits and save time, it is important to recognize these programs only as tools that can be used to compliment your own trading strategy. There is no one-size-fits-all solution for every trader, nor is there a bot which can transform an amateur trader into a professional overnight.
There are many factors that determine a bot’s success in the market, but most importantly it depends on the trader’s investing strategy. If the bot’s underlying algorithm and framework are designed poorly, the trader’s losses and lack of control will be amplified. Conversely, when implemented correctly, bots can assist traders with data and insights that can be used to make their own strategies stronger and more robust.
Whether you are a seasoned trader or a beginner, our Telegram Bot will do all the grunt work so you can focus on making the most informed trading decisions.