7 Things Every Investor Should Know About Crypto Trading Bots
The crypto exchange is vastly different from the stock market. Unlike the stock market, it is open every day throughout the year. While this has made trading more profitable, it has also created several problems. The extremely volatile nature of cryptocurrency has led to investors monitoring the market all the time.
Of course, this is not humanly possible. Fortunately, this problem already has a solution. Crypto trading bots, a tool to automate the transaction -execution process, can do what humans cannot. They have removed all the human limitations that lower the possibility of profits.
Here is a list of 7 things every investor should know about this revolutionary technology.
1. What Exactly Are Crypto Trading Bots?
Crypto trading bots are programmed to do a predefined monotonous task. They have a similar function to trading bots used in stock markets. They are configured to implement their user’s strategy and --execute transactions with various crypto exchanges. They are also capable of making decisions in seconds. Their usage in trading has reduced time consumption and led to more accurate results.
2. How do they Function?
Crypto trading bots communicate with cryptocurrency exchanges to buy and sell cryptos. The bot can either make decisions itself and --execute trades or send a signal to its investor when it observes market fluctuation. They are highly efficient and ensure error-free trading.
Most crypto bots offer three components:
- The first component, market data analysis, is straightforward. The data gathered from the market is used to decide the best-case scenario for profit generation. The investor can customize the type of data they want the bot to generate signals for.
- The next component is to predict the risk potential. Using big data, the bot predicts the possibility of risks in the market.
- The third component is trading cryptos. The bot uses its analysis and results to buy and sell cryptos at various crypto exchanges.
3. Types of Bots
The primary reason why crypto trading bots are preferred is their customization. A user can have the bot change as per their needs and plans. The three most popular types of bots available are-
One of the most used bots is the arbitrage bot. Arbitrage bot comes with the ability to simultaneously check prices on multiple crypto exchanges and use their price discrepancies to generate profits. Using these bots is one of the easiest ways of earning profits in the crypto market. The only downside to using arbitrage bots is that the profits are not huge.
An arbitrage bot that allows you to create a unique API for all the exchanges you use is the best. Another thing to look out for is the number of crypto exchanges it is compatible with. More the number of exchanges, the more chances you have to get profits.
Trend Trading Bot
These bots make decisions as per the trend history of an asset. If the trend shows a constant price increase, it will decide to --execute a long position. If the trend shows a price decrease, it will do the opposite.
Trend trading bots are best for more conservative investors as they consider the past performance of the asset.
Coin Lending Bot
This type of bot allows you to loan coins to small traders. These coins are lent at a predetermined interest rate. The coin lending bot saves a lot of time for the investors as now they do not have to search for the appropriate interest rate.
4. The legality of Crypto Trading Bots
One question that often comes up is the legality of using crypto trading bots. The technology does come off as suspicious, making it look illegal. You might be surprised to know that bots have also been used in stock and foreign exchange markets.
As such, it is perfectly legal to use them in trading cryptocurrencies. However, it is also essential to know that all brokers do not allow their usage. Therefore, before purchasing one, check whether the broker you use allows its use or not.
People often have a misconception that by using a crypto trading bot, they will get instant and effortless profits. While they can make trading effortless, they cannot wholly work without input. Bots work the way you configure them. So, as long as you configure them suitably, they will generate profits.
6. How to Choose the Right Trading Bot
Recent trading bots use artificial intelligence and machine learning to collect and interpret big data constantly. Bots can cost quite a lot of money, therefore, you should consider many factors before investing your money.
- Complexity: Check how complex handling the bot is. This is necessary because most investors do not have the technical knowledge that is required to use a bot. If you are a seasoned investor, you can use a complex bot, but a beginner might prefer a bot that uses existing and traditional strategies.
- Price: Bots are expensive. Carefully check the price of the bot you are thinking of purchasing and see that there are no hidden costs.
- Credibility: The credibility of the bot should be checked before purchasing it. Look for its market reviews and reputation amongst investors.
- Backtesting: Also check whether the bot allows backtesting or not. Backtesting is the method of checking the viability of a strategy without using actual money. This will help you in knowing whether your strategy will reap profits or not.
An investor can benefit greatly by using a crypto trading bot. Some of its benefits are-
- Eliminates the scope of decisions getting influenced by emotions
- Easily customizable
- Can perform multiple operations simultaneously.
- Increases efficiency and speed of transactions.
- Allows you to set unique API keys.
Some disadvantages of crypto trading bots include no guarantee of profits, incorrect configuration by the maker, and the chance of getting hacked.
Crypto trading bots’ best utilization is in automating repetitive and arduous tasks. They are capable of generating huge profits if you choose a suitable trading bot. Remember to test it yourself to ensure quality.