How Crypto Trading Bots Work

How crypto trading bots work

So you have heard about these Cryptocurrency trading bots but wonder how they actually work?

Well, the technical details aren’t all that confusing and let me tell you something: You don’t need to know programming or any advanced technical know-how to use one!

With that said, in this article, I am going to show you exactly how Cryptocurrency trading bots work, if they are profitable, which ones to use, and much more!

So, how do Cryptocurrency trading bots work?

Cryptocurrency trading bots are designed to buy and sell Cryptocurrencies on their own.

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Their actions are determined by the parameters set by the owner of the bot. Then the Cryptocurrency trading bot buys and sells Cryptocurrencies, based on how the market behaves.

What do Cryptocurrency trading bots do?

Cryptocurrency trading bots just buy or sell Cryptocurrencies on their own, without having real humans placing orders.

How crypto trading bots work

While actual humans do not place the orders directly, they do control the bot indirectly by writing the code and adjusting the parameters the bot uses. Basically, any Cryptocurrency trading bot takes inputs, and based on the code and parameters set by its owner, it takes action by buying and/or selling certain Cryptocurrencies.

The inputs a Cryptocurrency trading bot uses are typically the volume, the orders, and the price of any Cryptocurrency.

But of course, anybody can use many more, or less, in their Cryptocurrency trading bots.

Sure, there have been trading bots before Cryptocurrencies were invented, but those were mostly controlled by large institutional investors and were very expensive.

But why is it now possible for anyone to create Cryptocurrency trading bots, if it wasn’t possible before, you might ask?

For the simple reason, that now most Cryptocurrency exchanges do grant everybody permission to look at the orders that were made.

This was introduced because of the open and decentralized nature of Blockchain technology.

One big question remaining is, how a bot is able to communicate with a Cryptocurrency exchange and able to read all the market activity and orders placed.

This is all made possible with APIs.

Without getting to technological here, API is short for Application Programming Interface and it allows a program to extract and place specific data to another program.

Cryptocurrency trading bots

In our case, the bot is extracting the market conditions from an exchange and placing orders.

Types of strategies Cryptocurrency trading bots use

As you know, there are different trading strategies.

While every bot is a bit different, there are some overarching strategies.

In the following section, I would like to present you the most popular trading strategies that are used by Cryptocurrency trading bots.

The Arbitrage strategy

This strategy is one that was very effective in the early days of Cryptocurrencies but is sometimes also very profitable nowadays.

What the Arbitrage strategy does, is simply buying a certain Cryptocurrency for a low price on one exchange and then selling it for a higher price on a different exchange.

To understand this strategy fully, you first have to understand that there is no central price for a certain Cryptocurrency.

There are many Cryptocurrency exchanges and they all have their own prices based on supply and demand on that particular exchange. With that said, somebody could buy a certain Cryptocurrency on one exchange, where the price of that Cryptocurrency is low and sell the same Cryptocurrency immediately on another Cryptocurrency exchange, where the prices are high.

This strategy works great in the Cryptocurrency market, compared to the stock market, for example.

This is due to the fact that Cryptocurrencies are decentralized and there are many exchanges, where you could use this strategy.

Also, a trading bot is much more helpful in this kind of strategy since it is much faster in buying a Cryptocurrency on one exchange and selling it on another exchange. It is way faster than an actual human could ever be.

As said in the beginning, this strategy worked better in the early days, because there were greater price differences among different exchanges.

The Market Making strategy

This strategy is called “Market Making” because the trading bot literally makes the market.

Types of strategies Cryptocurrency trading bots use

(It creates supply and demand)

In other words, the bot is placing buy and sell orders at the same time and is profiting from the resulting spread.

This may sound confusing. It certainly sounded weird when I first heard it.

Basically, you just place orders to buy and sell a particular Cryptocurrency.

As time goes on, you are buying and selling Cryptocurrencies constantly to profit from the price difference.

This strategy totally can be profitable at certain time periods, but if there is too much competition, or if you are in markets where there aren’t many people buying and selling that Cryptocurrency, it sure can be unprofitable, too.

The Trend Trading strategy

Trend Trading is a strategy where the bot is trying to calculate if a certain Cryptocurrency is going up or down in value over a certain period of time.

How crypto trading bots work

It uses many inputs like the volume, price, and orders to determine whether the Cryptocurrency will go up, or down in value over a certain period of time.

If the bot thinks that the Cryptocurrency will go up, it buys it. If not, it sells that Cryptocurrency.

This strategy is basically trying to predict the market, which is a thing that all investors would like to do.

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While the 2 strategies that I mentioned before were a “safer” way to make money, (They are still very risky. I am just comparing them to this trading strategy) this strategy is trying to beat all other investors and bots over a long period of time.

In my opinion, this strategy is a very risky one, except your bot, has proven itself to be right a lot of times in the past.

The Mean-Reversion strategy

The Mean-Reversion strategy assumes, that an asset has a predefined value and that all prices will trade “around” that price.

Basically, this strategy is saying that there is a fixed value to an asset and that prices fluctuate around that value, but will (after some time) always return back to that value.

In my opinion, this strategy works great in old and mature markets, that have been around for at least a century.

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For example gold. The gold price has been fairly constant over the years, so you can calculate an average mean and if the price is greater than the mean you sell, if it is lower you buy.

The problem I see with this strategy in the Cryptocurrency market, however, is that Cryptocurrencies have no fixed underlying value and the market is a very new and volatile one, so it’s hard to calculate an average mean.

Because of the Cryptocurrency market’s crazy up-and-down trends, it is nearly impossible to identify the average mean and use it reliably.

How profitable are Cryptocurrency trading bots?

This is a very difficult question to answer.

Let’s put it like this: If you are a beginner and do not know how to use them, then it will most likely be an unprofitable investment for you.

How do crypto-trading Bots work?

(Except if you are some genius trader)

Just think it through logically: If somebody had a fool-proof way of making money by letting a program run in the background of his computer, do you think he would tell other people about it for 100 Dollars, 1000 Dollars, or even 10,000 Dollars?!

So be cautious, as most of the bots that claim to make you money without you doing anything are most likely scams.

See, most people see Cryptocurrency trading bots as a magic piece of software that can make their numbers go up “magically” in their bank account.

But that’s not how trading bots work.

Cryptocurrency trading bots and any other bots for that matter are just tools. They help you be more efficient with your buying and selling of Cryptocurrencies, but it is still you that has to make all the decisions, set all the parameters and adjust the bot over time as the Cryptocurrency market evolves.

I just want to give you the right mindset, so you do not have false expectations when buying a Cryptocurrency trading bot.

Always remember that it will be still you making all the important trading decisions and the bot will just help you be more efficient.

How crypto trading bots work

But if you can’t make the proper trading decision without a bot, then a bot most likely can’t help you.

To get back to the question: How profitable are Cryptocurrency trading bots?

This really depends on your skills as a trader and how you use them.

Also, to make a substantial amount of money trading Cryptocurrencies you will need a stack of Bitcoins which you can use to trade.

Like an initial investment.

To give you an example: The Viacoin developer and well-known Cryptocurrency trader Romano says that he makes around 2000 Dollars a day by using a trading bot.

What do Cryptocurrency trading bots do?

Also, he says that he uses 9 Bitcoins to make these kinds of profits.

So it’s definitely possible to make a whole lot of money trading Bitcoin, but you need to know what you are doing to make it profitable.

The technology behind Cryptocurrency trading bots

First of all, every Cryptocurrency bot needs a server, that should be up 24/7.

Downtimes are really bad because if the bot buys some Cryptocurrencies and calculates to sell them during a downtime of the server, this could mean a loss.

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Depending on how much the bot is trading with, it could be a loss of thousands of Dollars. So get a reliable server that does not have downtimes.

Second of all, every Cryptocurrency trading bot needs an exchange where it will perform all the orders.

The exchange should ideally have an API, that can be integrated into the code of the bot, so the bot can easily place orders and read the market activities.

And, of course, the last thing every Cryptocurrency trading bot needs is a well-programmed script that tells the bot under which conditions to buy and/or sell certain Cryptocurrencies.

Also, Cryptocurrency trading bots come in many forms. They could be browser plugins, OS clients, trading servers or others.

Benefits of Cryptocurrency trading bots

There are many benefits of Cryptocurrency trading bots that traders can use to leverage their trading power.

Bots are always online

The first and most obvious advantage of a Cryptocurrency trading bot is, that it can operate 24/7 and make profits (or losses if not set up correctly) all day long.

Every human has to sleep, including Cryptocurrency traders, so trading bots are a great opportunity to leverage yourself while you aren’t actively on your computer.

Bots have increased accuracy

Humans make mistakes, bots not so often.

Another advantage of Cryptocurrency trading bots is, that they execute their orders very precisely.

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Way more precisely than any human could.

No human can perfectly time orders manually in time frames of milliseconds, but bots can. So bots can maximize a trader’s results by performing certain actions very precisely, without any human error.

Bots react better

In a volatile space like the Crypto-market, market shifts can happen very fast, so it is important to react to shifting conditions very quickly.

This advantage is very similar to the advantage stated previously, but also implies how fast one can adapt to the market.

Bots can process information way faster than any human, and so if they notice slight changes, they can quickly adapt and adjust their strategy.

Bots have no emotions

A thing that every investor has to keep in tight control is their emotions.

Trading based on emotions can be very dangerous as you start making decisions that aren’t aligned with your logical way of thinking, you could lose a lot of money, as you are basically starting to gamble.

On the other hand, if you let a bot execute your trading strategy you do not have to worry about your emotions influencing your trading decisions, as the whole task is handed over to a robot, who does not trade based on emotions, but based upon your previous inputs.

Bots can backtest more efficiently

Backtesting is a process, where a trading strategy is tested against historical data.

This creates sort of a simulation, where you can simulate the success rate of your strategy and how likely you are to make a profit.

Bots are way more effective in doing backtests than humans, so it makes more sense to let a robot do all the backtesting for you, and determine which trading strategy would be the most optimal one at any given point in time.

Bots can diversify better

By using bots you can diversify your trading activity across different accounts.

Also, with the power of trading bots you can try many different trading strategies at once, so if one trading strategy turns out to be unprofitable, you can still have other trading strategies making profits for you.

These tasks absolutely can be done manually as well, but bots are faster and more efficient than humans, so it makes more sense to hand this task over to a trading bot.

Disadvantages of Cryptocurrency trading bots

While there are a lot of benefits, many of which I presented to you above, there are also some drawbacks when using Cryptocurrency trading bots you should be aware of!

Bots need to get looked after

While, in theory, you only have to write the code for your Cryptocurrency trading bot once, and insert your desired parameters, you still need to do some maintenance work.

But in reality, you always should, and need to look after your bot and see if everything runs smoothly.

Some of the things that could occur are server issues, which I already discussed above, are bad.

For example, if your connection is lost, if you the computer does not have power, or if anything happens with your computer.

While these errors are serious once and should be addressed as quickly as possible, once they are discovered, more than not issues concerning the Cryptocurrency market are the actual problem.

Market anomalies aren’t rare, especially in a volatile market as the Cryptocurrency market.

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So it is always best to keep an eye on the bot and see if there are scenarios where your trading bot is unprofitable.

Bots depend on a trading strategy

While I mentioned above that it is a good thing that trading bots always follow the trading strategy you set for it, it could also be a disadvantage.

A human can adapt their strategy based on market conditions and change their orders. A bot, on the other hand, always follows the set of rules that were given to him beforehand and will never change it’s strategy radically, if not specified in the code.

While humans also operate based on emotions, they are more flexible to adapt and can radically change their strategy, while bots can’t.

Bots can be scams

I already mentioned above, that it is very unlikely that somebody that has a fool-proof way of making money online, without doing any real work, will actually tell others about it.

So you have to be extremely careful when choosing a Cryptocurrency trading bot (if you buy one, and don’t program it yourself) because there are many scams out there.

So always remember to do a lot of research and make sure that the bot is actually a trustworthy and great tool and not a scam.

Best Cryptocurrency trading bots

Now I would like to show you the top Cryptocurrency trading bots that are available on the market right now.

Gunbot

Gunbot is arguably one, if not the best crypto trading bot on the market right now.

It offers more features than it’s competitors, meaning you can customize it more and adjust its settings better.

A cool feature that is available with Gunbot is the ability to create your own trading strategies.

This is very cool to play around with and gives you full control over the trading strategies you can use to make the most out of your trades.

Gunbot also offers to trade on a lot of different exchanges, including Binance, Bittrex, Polinex, Bitfinex, Cryptopedia, Cex.io, Kucoin, GDAX, and Kraken. This is cool because that way you can diversify your accounts and also do some arbitrage among the different exchanges if the opportunuity opens.

Gunbot also has a big and active community.

How crypto trading bots work

This is great because if you ever feel stuck with the software, you can always ask for help on places like Reddit and other forums.

Another awesome thing about Gunbot is, that you only pay a one-time fee and can then use the software for as long you want AND you will get lifelong updates.

The prices vary, depending on which pack you choose, ranging from the Starter Pack to the Ultimate pack. The Started Edition costs 0.04 Bitcoins, while the Ultimate Edition costs 0.3 Bitcoins.

Gunbot’s Starter Edition gives you access to 3 strategies on one exchange.

The Ultimate Edition, on the other hand, gives you access to all strategies on all supported exchanges, and you will get some advanced features like Backtesting and Cryptosight.

Gunbot can also execute conservative trading strategies successfully, making it possible to leave it to trade on itself and make conservative profits on the side.

Gunbot is a software which runs on your desktop, meaning you will be able to run it on Windows, Mac OS, Linux and on a Virtual Private Server (VPS).

Right now Gunbot has around 6.000 daily users.

If you are interested in buying Gunbot, click here.

Gekko

A great advantage of Gekko is, that it is open-source on Github (don’t worry, you do not need to know programming to use it) that it is a free crypto trading bot.

It’s open-source, which means that it is constantly improved by developers all over the world.

How crypto trading bots work

Also, it supports 18 exchanges, including Bitstamp, Poloniex, and Bitfinex.

Because of its open-source nature, you can view the source code and make adjustments so that it fits your unique investment strategy.

Gekko trading bot is an easy-to-use Cryptocurrency trading bot and comes along with some standard trading features.

Some of the things you can use Gekko for are to aggregate live market data, calculate indicators, execute live orders, simulate order execution, calculate profit and risk metrics, manage and import historical market data, simulate live markets with historical data, and graph all of the results in simple and easy-to-use web interface.

Gekko can run on almost every modern computer and is compatible with major operating systems like Windows, Mac OS, and Linux.

Another cool feature is, that Gekko can notify you via Telegram, E-Mail, and other social media platforms, to keep you up to date.

An important note: Gekko is not designed to be a high-frequency-trading bot.

This means that it can’t perform arbitrage strategies or other strategies that require very fast orders.

To download Gunbot for free, click here.

Zenbot

Same as Gekko, Zenbot is open-source and completely free Bitcoin bot to download and use.

It is available on every major operating system and since it is open-source, you can change the code to fit exactly your strategies.

A cool thing about Zenbot is, that it was created using Artifical Intelligence.

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Unlike Gekko, Zenbot is able to perform high-frequency-trading and can use the arbitrage trading strategy. Also, this Cryptocurrency trading bot can perform several trades at once, which is a very powerful feature to have.

Some of the Cryptocurrency exchanges that the Zenbot supports are Kraken, Gemini, GDAX, Bittrex, Quadriga, and Poliniex.

Same as Gekko, it is still being developed and updated by talented developers all over the world and they plan to make it support all Cryptocurrency exchanges.

One negative thing to note though: As mentioned in the previous sentence the developers said they would make it support more exchanges, but they haven’t released a new version in a couple of months now, which makes the Zenbot community question it a bit.

But nonetheless it is an awesome Cryptocurrency trading bot because it offers many trading strategies, including the arbitrage strategy, plus it is completely free.

If you are interested, you can get Zenbot here.

HaasBot

HaasBot is clearly the most expensive Cryptocurrency trading bot I am going to talk about in this article, while arguably also the most complete one.

It does much of the labor with minimal effort.

The price of HaasBot ranges from 0.12 to 0.32 Bitcoins every 3 months, so if you plan on using HaasBot you need to be very committed and knowledgeable, in order to get a good Return on Investment.

It supports most popular exchanges and offers the unique features called candlestick pattern recognition capability.

With this feature, it can “predict” trend patterns and act accordingly.

If you interested in getting HaasBot, click here.

Conclusion

Whew, this was a pretty long article and I really hope I could answer most of the questions you had around this topic.

Now I would like to hand it over to you: Do you use a Cryptocurrency trading bot, or do you plan on buying one?

Let me know in the comments below.

Thanks a lot for reading all the way to the end and I wish you an awesome day!