What is a Cryptocurrency Trading Bot?

Trading bots were conceptualized way back in 1949 when Richard Donchian developed a system that would allow automated systems to follow a set of rules to buy and sell financial instruments. His idea of rules-based trading was adopted by famous traders particularly Henry Ford and also by many others in the 1980s. Trading bots saw the limelight as more people continued to show interest. However, they were very expensive and scarce and only wealthy investors could afford them.

Cryptocurrency Trading Bots (Source: Finextra Research)

The cryptocurrency market is more volatile than the average financial market. Since cryptocurrency trading could be done throughout both the weekdays and weekends without the market closing at any hour, the need for cryptocurrency trading bots is of exceptional note. With a cryptocurrency trading bot, traders can take advantage of the volatility of the markets to make a huge profit.

How Cryptocurrency Trading Bots Work

Cryptocurrency trading bots constantly monitor the market and sudden price changes and react accordingly based on the pre-determined rules given by their trader-users or their developers. The goal of the bots is the same as that of the traders: to make as much profit from the market as possible, as they can.

Because the trader cannot guarantee his presence every time, he can develop a set of instructions that the trading bot will adhere to strictly while making trades on his behalf. Since the bot cannot think for itself, the onus is on the trader to have carefully researched the set of instructions before giving them to the bot to follow. 

A cryptocurrency trader needs to test the bot before he begins trading with real capital. He should develop a trading strategy that the bot will follow to help it know what and when to trade. He should also test the performance of the strategy before implementing it on a real account. The logic he coded into the bot will be converted into a language that his cryptocurrency trading exchange or brokerage platform can understand. 

Then, the bot will execute the trades automatically.

What Is a CryptocurrencyTrading Platform?

A cryptocurrency trading platform is an exchange platform that allows cryptocurrency traders to exchange one digital currency for another or to convert digital currencies to fiat currencies. Before you trade cryptocurrency on exchange platforms, you need to open an account on them. Cryptocurrency trading platforms provide the environments to trade cryptocurrencies and also allow you to store them in a wallet.

Types of Cryptocurrency Trading Bots

There are four types of cryptocurrency trading bots based on the functions for which they are used.

  1. Arbitrage Bot – Arbitrage bots check the prices between cryptocurrency exchanges and trade based on the discrepancies between the prices.
  2. Market Making Bots – They make several buy and sell orders to exploit the market and make fast profits.
  3. Algorithmic Trading Bots – They help to generate buy and sell signals in cryptocurrency markets.
  4. Portfolio Automation Bots – They do not directly deal in active trading. However, they complete most of the boring repetitive tasks on behalf of their users.

Why You Need a Cryptocurrency Trading Bot

Before purchasing a cryptocurrency trading bot, you need to ask yourself why and if you truly need them. Trading bots can be extremely useful for the traders willing to utilize them. Here are some of the reasons:

  • To Handle Your Repetitive Tasks – Repetitive tasks are time-consuming and tiring. Trading bots can help you handle them. The bots allow you to copy and paste those tasks so that you can trade with ease.
  • For 24/7 Availability – A trading bot would help you handle most of the tasks in your absence as long as you have programmed a set of instructions on it. It affords you time to take care of other things without having to worry too much about the market.
  • Timing – Cryptocurrency trading bots can notice and take advantage of the sudden movements caused by the volatility of the market. Apart from that, it also maintains a high level of accuracy and precision. With the right trading strategy, the bot can help you make a lot of profit.
  • No Hindrance Caused by Emotions – When the trader makes decisions himself, he is susceptible to diverting from his trading strategy and making decisions based on his guts and emotions instead. However, a trading bot has no such problem. Rather, it follows the trading strategy to the letter.

The information on this website and all associated literature are for educational and informational purposes. It does not constitute a fiduciary duty or obligation between Uncut Lab and you. Please consult your financial and investment professional for your specific situation.

author

Lucas

I am the Uncut Lab resident cloud computing junkie. I help curate the written content in our Education Corner, providing engaging articles on foundational concepts in cloud computing, data analytics, machine learning, and blockchain technology. Feel free to reach out to me with questions or topics that you would like us to cover. Thanks!

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