What’s the difference between a crypto trading bot and a crypto trading platform?
There are many simple, off-the-shelf automated crypto trading bots available for purchase, subscription or free download. Their value proposition is simple – offering traders the ability to automate their trades, and wait for the robot traders to make profits. This is not always the case, however. While basic bots can be connected to a user’s exchange account and can execute buy/sell orders automatically, users have limited control over the bot’s strategy making them less useful for advanced traders.
These bots are ready-to-go ‘blackbox’ solutions with few options for customization. Users have to rely on the programming skills and strategy of the original creator. The quality of these trading bots varies from good, to fair, to poor, to outright scams.
Identifying which crypto trading bots can turn a profit, and which are failed experiments, or worse, are designed to steal the user’s money is a daunting task. While a free crypto trading bot sounds like a good deal, free doesn’t mean quality, and the ‘best bot ‘ really depends on a user’s needs and experience.
Another issue is that off-the-shelf bots are limited and don’t consider all the factors that make markets move. They can be caught out by unexpected factors such as a flash crash, exchange hack, or major news event. Events of this kind make the crypto markets very volatile and without human supervision, these bots can make unprofitable trades that result in user losses.
As a result, in 2024, the trend will continue to be towards customizable trading platforms that give traders granular control of their trading strategy with automated rebalancing strategies to protect profits. These platforms offer a range of other features including social integrations, back-testing, paper trading, a community, support, copy trading, portfolio tracking, auto-portfolio rebalancing, and more.
Reasons to consider using a trading bot platform
Some of the advantages of using a crypto trading bot platform include:
Trade 24/7
Unlike traditional markets, crypto markets never sleep and it is possible to transact in today’s global crypto economy 24/7. For traders this presents a dilemma — nobody can watch the market all the time. Crypto market participants will be familiar with the thrill of waking up to a portfolio gain, and the reverse is equally true — traders with open positions risk waking up to a negative news event that has adversely affected a position leading to a loss.
Save time
This is the number one advantage that automated trading and crypto bots provide: efficient, rules-driven trading without having to watch the markets. Even active crypto traders are sometimes unable to dedicate time to the markets. Automated trading strategies provide the means to generate trading profits without being tied to a screen.
Find new opportunities
A bot is always online and can relentlessly hunt the markets for an opportunity to make a profit 24/7. The volatile crypto markets can change very quickly, and bots are always ready to exploit a change in market conditions. Depending on what parameters have been set, once the bot sees the opportunity, it will execute.
Take the emotion out of trading
Traditional day trading is one of the most stressful occupations on the planet. The volatility in the crypto markets amplifies this stress even more. Crypto trading can be a rollercoaster of emotions, characterized by extreme highs and lows. Humans are emotional creatures and prone to many biases that affect decision-making. This can lead to costly miscalculations in the high-stakes world of crypto trading. A rules-based, crypto bot trading strategy can help protect a trader from their own worst enemy – themself.
Generate income
Unlike stocks, crypto assets don’t pay dividends. From an investment perspective, crypto assets can be viewed more like a commodity. However, in a bear market there is no reason to hold on to a commodity as it doesn’t deliver a return aside from price appreciation, which is unlikely in bearish conditions.
Trading bots can provide crypto holders with a passive income, by leveraging their crypto assets via trades. This income stream is not as safe or reliable as crypto compounding interest, but it is one of the few options available to crypto investors who intend to hold their assets for the long term.
If a trader can create an automated trading strategy that performs well over a consistent period, it may generate a long-term passive income. Copy trading platforms allow investors with no trading experience to ‘copy’ the trades of professional traders, or to copy pre-set algorithmic trading strategies run by the platforms.
Advantages to trading the crypto markets vs stocks
- Crypto markets are open 24/7
- Low barrier to entry
- Anyone can join an exchange and start trading
- Volatility means you can make quick profits (or losses)
Trading is often compared to poker, and in poker, there’s a concept called ‘Table Selection’. This simply means a player can choose whom they play against. If the goal is to make a profit, given the choice, a rational poker player will choose to play at a table of weaker, less experienced players. Trading in the traditional financial markets is like sitting down at a table of professionals. It’s possible to win but you’ve got to be one of the best in the world. Cryptocurrency traders, however, are generally less experienced. There are some professionals, but the majority are retail investors.
This is another way of saying that crypto traders are less sophisticated than forex traders. This uncomfortable truth, combined with several factors unique to the crypto markets, has the potential to give savvy crypto traders an edge. Combine that edge with a backtested, algorithmic trading strategy (a crypto trading bot) and traders will give themselves the best chance to succeed.
The crypto market is often described as the ‘wild west’ because the market is largely unregulated. Every country and exchange has different requirements, and there are no global, standardized regulations. There is not yet an agreed-upon model for the reliable valuation of crypto assets. This regulatory uncertainty, the possibility of market manipulation, and ongoing price discovery create the trader’s best friend – volatility.
Crypto trading bot strategies
Automated trading bots are designed to be configurable to allow for a wide variety of trading strategies. From a simple trend-following strategy to more complex strategies that evaluate a wide range of data points, today’s bots are highly customizable. Common strategies include:
Trend following
A trend following strategy aims to identify the directional movement of an asset and gain from the momentum of this movement. The strategy will go long when the asset is trending upwards or go short when the asset is trending downwards.
Arbitrage
Arbitrage trading looks to exploit the difference in the price of an asset between different markets or exchanges. As a new and emerging market, the spread between different crypto exchanges can vary, though this has tightened as the market grows.
Market making
A market-making strategy is based on continuously buying and selling crypto assets (on both sides of the order book) to capture the spread between the buy and sell price as the price fluctuates.
Copy trading
Copy trading is a growing trend that allows users to automatically copy another trader’s trade. Copy trading often involves a social community and gamification elements such as a leaderboard. The rise of DeFi and the emergence of non-custodial platforms such as TokenSets means it is now possible to copy other traders, or take advantage of algorithmic trading strategies without giving up control of your private keys.
What are the risks of Crypto Trading Bot Platforms?
Trading bots and algorithmic trading strategies are simply a tool and there is no guarantee of profitability. There are also some risks associated with trading bots and automated platforms. It’s important to understand that trading bots are generally designed for traders, not investors, and some are not appropriate for people new to crypto or new to trading.
Are you an investor or a trader?
If you’re a casual investor intending to buy and hold crypto assets, a complex black box trading bot strategy may not be appropriate. Investors with no trading experience can opt to ‘copy’ other traders or use existing algorithmic strategies on a trading platform. While platforms vary in their complexity, users with some financial literacy, analytical skills, and trading knowledge will have an advantage over those who don’t.
Beware of scams and hidden fees
Unregulated, emerging boom markets and new technology tend to attract bad actors. Some crypto trading bots are designed to exploit unsophisticated traders by stealing personal data and funds. Do your due diligence. How? Ask yourself how credible is the team that created the bot or platform? Do they have a public profile? A support team? Can they be contacted? Do they have a community of satisfied customers? Are the fees clearly explained and easy to understand? Are there any hidden costs?
A bot is just another tool in the trading tool kit
While you can set and forget most cryptocurrency trading bots, the best solution is a combination of automated trading with ongoing human supervision. Crypto market conditions can change extremely fast so traders need to ensure they are constantly adjusting the parameters of their strategy to reflect this.
There are unknown unknowns
The volatility in the crypto markets makes crypto trading the riskiest of all. Bots can be buggy, can suffer from poor programming, and can be caught out by unusual market conditions like flash crashes or major news events. Expect the unexpected.
