What Is a Crypto Trading Bot and How Does it Work?

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On Wall Street, the saying goes “Money Never Sleeps,” which became an Oliver Stone movie title. Bankers figure that money never sleeps because somewhere around the world, you can always make a deal and at least one type of market is often open and trading. That being said, most financial institutions and markets are closed during nights and weekends. 

By contrast, cryptocurrencies trade around the clock, 365 days a year. It’s biologically impossible for a trader to take advantage of every opportunity in the market. But it’s not technologically impossible. In fact, algorithmic trading plays a huge part in the global financial markets and the crypto markets are no different.

Once configured, crypto trading bots take over most of the work, seizing opportunities as they arise in the rapidly evolving crypto market. Automated trading leaves no room for guesswork, executing trades with fixed parameters while minimizing execution risk. However, an inaccurate crypto trading bot could also cause heavy losses.

Today, we’ll be taking you through the types of crypto trading bots, highlighting pros and cons, and breaking down a few of the many crypto trading bots on the market. 

What Are Crypto Trading Bots? 

A crypto trading bot is an automated software designed to monitor, analyze and execute trades across cryptocurrency exchanges using predetermined inputs. 

Typically, these bots use trading algorithm programs to buy and sell crypto according to specific strategies automatically. The most common algorithms are market making, trend following, and mean-reversion programs. 

  • Market-making algorithms produce a consistent bid-ask spread, by which they try to buy at lower prices and sell at higher prices. This also generates market liquidity.
  • Trend following algorithms analyze a cryptocurrency’s momentum and place trades accordingly which follow the trend. 
  • Mean-reversion algorithms assess whether crypto looks like it will be returning toward longer-term averages. For example, the algorithm can look for prices that are high but likely to pull back or low prices likely to rebalance to higher levels. 

Every transaction fee needs to be factored into trading calculations, and the top-performing algorithms pick the best exchange to get an edge on transaction costs. Trading using crypto bots can be powerful, clearing away the complexity and confusion associated with trading different strategies simultaneously on multiple crypto exchanges. 

Given the extreme volatility of the crypto markets, a crypto trading bot can help novice and advanced traders manage risk easier while offering trading flexibility and discipline. Automated crypto trading bots can also take human errors out of the equation and can seamlessly trade crypto across markets faster than any person can. 

Types of Crypto Trading Bots

Cryptocurrency trading bots use time-tested strategies developed by successful traders. From arbitrage to technical analysis, bots can specialize in specific types of trading. Here’s a breakdown of the main automated crypto trading software available.

Arbitrage Bots

Arbitrage is a trading strategy that refers to exploiting price differences across exchanges and profiting off of market inefficiencies. Crypto arbitrage bots compare the price of cryptocurrency coins and tokens across different exchanges. 

Every cryptocurrency exchange will have a slight variance between crypto prices, determined by the participants on that exchange. The only way to capture the variance fast enough and seize profit is to use an arbitrage bot.

These bots move rapidly to trade profitable differences, as markets beat exchange pricing that may be slightly delayed. 

Market-Making Crypto Trading Bots

On the other hand, market-making crypto trading bots create a bid-ask spread in the market, which is the positive difference between the selling and buying price. The primary purpose of market-making bots is to fill up order books with buy and sell orders so that other market participants can execute their orders accordingly. 

To sustainably generate buy and sell orders, market makers need to make money as well. Automated trading bots help to place multiple buys and sell orders simultaneously to generate that margin. For example, the bot will create a buy order for $0.49 and sell the same token at $0.51. Once both orders are filled, you net a $0.02 profit.

Technical Crypto Trading Bots

Technical crypto trading bots trade using preconfigured technical indicators to seize opportunities. While the technical analysis of current markets can occur intraday or over longer periods.

Most technical trading bots offer both customizable signal trading and social trading, allowing you to follow and copy the indicators of other successful traders. 

Portfolio Automation Crypto Trading Bots

Portfolio automation crypto trading bots automatically carry out trades to rebalance your portfolio according to a predefined schedule.

Rebalancing can be set up for your desired cycle, whether it be every 30 minutes, each hour or longer. Simplified portfolio management frees up your time and helps you maintain a well-disciplined portfolio. 

Coin-Lending Bots

Coin-lending bots automate the process of cryptocurrency lending at profitable interest rates with limited risk. The lending bots operate complex algorithms to constantly monitor the digital asset marketplace, managing and renewing loans.

They manage the supply and demand for loans, creating optimal interest rates for all supported coins.

What Does a Trading Bot Look Like? 

Every bot will have a different interface, but most resemble the trading screen of your average cryptocurrency exchange. You’ll see charting, order books and automated trading strategies available for selection.

Here’s a glance at the interfaces of a few of the top crypto trading bots available. 

3Commas Trading Bot
CC: 3Commas Trading Bot

How Do These Bots Work? 

Crypto trading bots communicate with crypto exchanges and place orders based on your preset instructions. Normally, this is done by providing the bot with authorized access to your crypto exchange account via Application Programming Interface (API) keys. 

Once set up with permissions in place, the bot pulls and analyzes market data on the fly, trading automatically based on the configuration you give it. Two core permissions are typically granted: the ability to read and display a balance, and the capability to trade. If you want to stop using the bot, simply revoke the permissions from all affiliated crypto exchanges.

For example, you can deploy a crypto trading bot by connecting your Bybit account to 3Commas via the provided Bybit API keys. The trading bot allows the bot’s artificial intelligence (AI) to conduct a trade analysis.

Typically, the best crypto trading bots need to go through three stages: 

  • A signal generator stage, which makes predictions and identifies possible trades based on market movements and, oftentimes, technical indicators. 
  • The risk allocation stage is where the crypto trading bot distributes risk in accordance with parameters set by the user. These preset parameters usually determine how much capital should be allocated in a trade. 
  • The execution stage is where the actual buying and selling of cryptocurrencies takes place. 

When Should I Use Crypto Trading Bots? 

Trading bots save time with many operations, including portfolio diversification and management, rebalancing, market analysis and smart order routing. 

The best part is that they are customizable to carry out specific tasks. If an action is repeatable with specific guidelines, a crypto trading bot can probably do it for you. For example, crypto trading bots assist in portfolio rebalancing, which can be tedious, time-consuming and needs to be done at intervals. 

Similarly, tasks that require high precision can be assigned to crypto trading bots. Selling an asset at a specific price might be humanly impossible to track as prices change very quickly. Bots monitor crypto exchanges for specific conditions and execute trades at the precise moment needed.

Crypto trading bots also carry out complex trades. For instance, smart order routing requires monitoring countless trade pairs across exchanges to determine the time, quantity and price at which to execute a trade. This needs to be done quickly before market conditions change. Such complex strategies can be implemented using crypto trading bots but are difficult to execute manually.

If you find yourself pouring more and more time into managing your portfolio, a crypto trading bot may be for you. Bots can be a cost-effective method of finding effective trades. At most, you pay monthly subscription fees and perhaps a developer to fine-tune your trading strategies.

Benefits of Using Trading Bots

From reaction time to a machine’s processing capability, crypto trading bots have many benefits. Here are reasons to set up an automated trading platform. 

Eliminate Emotions

No matter which automated trading bot you’re working with, no emotions are involved while trading. A crypto trading bot’s decisions are rational and immediate, acting from definite strategies.

Eliminating fear of loss, the greed of profit and the human tendency to be scared of uncertainty creates a more disciplined trading process. 

High Efficiency

Trading bots react immediately, trading within the confines of your configuration. Combine instant decision-making with the rapid processing time of market information, trading patterns and risk assessment, and you experience unbeatable efficiency.

Crypto trading bots remove human error, while also minimizing potential delays from manual handling and analysis of large data sets. 

Trading With Discipline

Even though there isn’t a single formula for success in a market as volatile as crypto, automating the trading process via bots ensures trading consistency and discipline. Operating under pre-established trading conditions, bots optimize long-term performance by consistently analyzing the market.

Trading That Doesn’t Turn Off

Crypto markets never shut down, leaving trading bots as the only viable solution for anyone who wants to maximize their earnings around the clock. 

Are Crypto Trading Bots Profitable?

Algorithmic trading can be profitable. This only works if you know what you’re doing. Unfortunately, just like any trading strategy, crypto trading with bots can be dangerous.

The main problem lies between the algorithm built behind the bots and the extent to which a novice trader understands. Since algorithmic trading bots are built by experts to suit their demands, there’s no guarantee that what works for their creators will turn out to be great for you. 

On the flip side, crypto trading bots indeed do their job to eliminate emotions and uplift the trading accuracy. But it doesn’t mean that every trading bot is effective or on the level. This is especially true of free crypto trading bots that are offered to the public. These bots are usually flawed and may contain all sorts of algorithms to infiltrate your funds. 

The Limitations of Crypto Trading Bots

Every crypto trading bot, regardless of how advanced it may be, will have inherent limitations. Also, keep in mind that not all bots are created equal. Bots may come with a steep learning curve. 

Your starting configuration, with settings provided by the bots, may not make you money. In addition, it takes repeated testing in order to be effective. If the trading algorithms, strategies and signals you’re using are widely available, their ability to turn a profit quickly diminishes as more people use them. It takes fresh algorithms, customized strategies and new trading configurations for each bot to try to beat the market.

You also need significant comfort with your crypto trading bot. A poorly designed, inaccurate trading bot can result in heavy losses, especially if it can execute a large number of trades quickly. Even a single bug in the source code can be painful.

List of Recommended Trading Bots

Here are five of the best cryptocurrency trading bots available. 

3Commas

Overall4.5 Stars
Fees and Account Minimums4.0 Stars
Ease of Use4.0 Stars

3Commas is a smart trading terminal and auto trading bot suitable for traders of all levels. This crypto trading bot features an intuitive user interface, and the flexible customization allows users to enter and exit any point of trades. It’s one of the most transparent systems boast on the parameters you set, and it safeguards your funds through the financial protection algorithm. 

HassOnline

Overall4.0 Stars
Fees and Account Minimums3.5 Stars
Ease of Use4.2 Stars

Haasonline is one of a more advanced automated crypto trading bots. Not only it allows traders to use it for high-frequency crypto trading, and the HaasScript helps intermediate to advanced traders customize unique automated trading algorithms, technical indicators to interpret signals and trade the way they like.

This platform focus on transparency and have great community support on discord. Though there’s a learning curve to this platform, it’s easy and intuitive to use once you get a hang of it. 

Coinrule

Overall4.0 Stars
Fees and Account Minimums4.0 Stars
Ease of Use4.2 Stars

Coinrule is a beginner-friendly no-code platform that works on over ten of the biggest crypto exchanges. Use Coinrule to automate well-known trading strategies such as contrarian trading and trend following. Long-term strategies take minutes to set up, letting you take advantage of periodic buy and sell orders without needing to watch the market.

Executium

Overall4.5 Stars
Fees and Account Minimums4.0 Stars
Ease of Use4.0 Stars

Executium is a low-fee directional trading platform that offers automated trading using provided market analytics. Built-in trading algorithms trade crypto pairs across popular crypto exchanges. Take advantage of limit, TWAP, iceberg, and stop-loss orders and you only pay for trades executed. Building directional strategies is easy, with both simple trading and advanced strategies for the options market available. 

Trality

Overall4.2 Stars
Fees and Account Minimums4 Stars
Ease of Use4.5 Stars

Trality is a cloud-based trading bot designed for beginners to automate trading. With Trality, bot building is simplified to the point where you don’t need a single line of code. Create crypto trading bots using either code or industry-tested rules. Algorithms can be customized by those with coding and quantitative analysis skills. 

The Bottom Line

Humans need sleep but bots don’t. As cryptos rise in number and value, the volume of opportunities becomes harder to track. Whether you’re an experienced trader or a beginner looking to make money, crypto trading bots offer reliability and stability amid volatile markets. Set one up today, and begin turning your insight into profit.

Disclaimer

This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

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