Cryptocurrency and blockchain are very complex technical concepts. The more a person can understand their basic ingredients, the better-investing decisions they can make. However, a cryptocurrency expert doesn’t need to be a programmer that can write smart contracts.
Therefore, investors who wish to understand the blockchain and DeFi sector should know about concepts like Crypto Trading Bots. There is more than one way of becoming a successful cryptocurrency investor. Getting familiar with cryptocurrency trading techniques is the best way to make more profits.
What is Crypto Trading?
Before diving into the concept of bots, it is first necessary to explore crypto trading. Cryptocurrencies are byproducts of blockchain that act as digital currency or medium of exchange.
Rather than paper money or fiat currency that is a legal tender under a centralized government, cryptocurrencies are alternative monetary apparatus. Many people compare cryptocurrencies with stocks or securities.
However, as per Howey Test digital currencies do not qualify for any type of stock. It happens because the Howey Test set two conditions for a security qualification that entails a promise of profit share and transfer of ownership.
Cryptocurrency traders do not get a share of the profit generated by the blockchain. On the contrary, cryptocurrencies generate revenue through an increase in their spot prices.
Additionally, cryptocurrencies also do not transfer ownership of the blockchain that issues them. Therefore, crypto trading is closer to commodities such as precious metals and real estate in comparison to stocks.
Cryptocurrency trading is the type of investment option that requires investors to purchase new currencies when their prices are low and sell them when their prices increase on a very basic level.
What is a Bot?
A Bot is a computer program that tries to mimic a human reaction. In many ways, it is not wrong to say that bots are considerably automatic and independent computer commands. Bots use technologies such as Artificial Intelligence and Machine Learning to improve their responses and keep getting updated. Bots in general can collect more data from their surroundings. Based on this new stream of data the processing capabilities of a bot can improve over time.
Even when bots are automated, it does not mean that they are fully sentient. Bots only can carry out the functions that their programming allows them to read and recognize. For example, a chatbot cannot make the most basic financial computations.
However, bots can also be used to generate automated replies for human users or other computer programs. At the same time, bots can also be programmed to perform specified functions automatically without requiring any manual triggers.
What is a Crypto Trading Bot?
A Crypto Trading Bot is a type of automated computer program that can make crypto trading decisions independently. It means that the programmers who are using these bots can put them in charge of their trading accounts and digital wallets.
These bots can analyze the data from the market and sell or purchase cryptocurrencies keeping in view the objective to maximize the profits. Under normal circumstances, a human investor has to keep analyzing the cryptocurrency market physically.
With a Stock market, the investors can take a break from the market analysis since the market is closed during the holidays.
However, with cryptocurrencies and DeFi trading keeps happening 24/7 and on an international scale. It means that calculating market variables become more challenging for a human trader.
However, if an investor can deploy a cryptocurrency bot it will start to analyze the market statistics automatically. In doing so, the bots will be able to make profitable trading decisions on behalf of the investor.
Therefore, cryptocurrency trading bots not only save time for the investors but also decrease the labor for these investors by many folds.
Creation of a Crypto Trading Bot
Many cryptocurrency investors assume that becoming a professional or bonafide broker is the top skill level for investing. However, in the modern era, the people who can work with data and programming are the ones who are in the most demand.
In the same manner, for expert cryptocurrency traders who wish to take their skills to the next level, it is a great idea to learn to create a Cryptocurrency Trading Bot. Here are some basic steps to create the first CTB:
Anyone who has intermediate knowledge of these programming languages can get a template from any open-source trading bots online and use them to create a personalized CBT after making suitable changes.
It is not possible to create a universal trading bot that is compatible with every cryptocurrency exchange. Every DEX or CEX is created based on different programming languages.
Therefore, the programmer should take into consideration what platforms they are targeting first and start from there. It means that they will be able to narrow down the platforms that should be compatible with their CTBs based on different services and data plugins.
The programmer needs to create trading accounts on all selected cryptocurrency trading platforms beforehand. Many bots can create automated accounts.
However, such bots are banned by search engines, and therefore cryptocurrency exchanges also discard such bots from their platform to avoid getting any penalties. Therefore, programmers should preferably create an account manually and comply with all KYC and AML requirements.
Bots are not sentient. They can only read the information that their programming allows them to comprehend. Advance bots can perform a multitude of functions.
However, when a programmer is getting started they should pick the simplest trading functions first for baseline CTB. Based on their functions and specifications there are many different types of bots. Start small and keep adding upgrades later to improve functionality.
Make sure to define the architecture of the bot in question in a very clear manner. It means that defines the performance criteria very clearly and considers all possible alterations in computations. It will prevent the bot from getting confused and deal with all variables effectively.
Coding is the main process where all the programming decisions take place. The investors also have the option to hire a programmer for creating a personalized CTB. The programmers and the investors must make sure that they make sure that all the technical and algorithmic aspects of the bots. Investors should also keep the user interface simple and easy to operate.
When a CTB has completed its encoding phase, it is time to start a test run. Developers prefer to deploy a new program on a test run before its final launch. This phase highlights any practical issues that the CTB can face. Furthermore, it will also allow the investors to understand its working mechanics and suggest changes for improvement.
Technical audit is a programming phase that sets apart common coding projects from professional pieces. A Trading Bot that has completed a qualified technical audit is considered very valuable in the market.
With Technical Audit, the CTB will become less susceptible to hack attacks and malware. Developers with limited budgets often skip this step. However, a cryptocurrency trader can also hire Cybersecurity consultants to perform this task for them.
Now every phase is done and all test and audit reports are positive it is time to deploy the CTB. It can take a little time to get the project up and running. The developers also have the ensure that the CTB has synced with the new trading environment and does not face any lags or glitches and runs smoothly.
The process of creating a CTB does not stop after the final deployment. The great thing about technology is that it keeps improving and changing.
Now, that the first CTB is live and in action the cryptocurrency investors have a lot of free time that they can dedicate to working on updates and adding innovations to their projects and skill set.
Key Features of a Crypto Trading Bot
Depending on the vision and experience of a developer and cryptocurrency trader, there are virtually no limits on the functional expansion of trading bots.
However, most traders try to keep the CTBs simple and rudimentary when they are starting. Rather than leaving all cryptocurrency trading decisions to the bots, experienced traders use CTBs for three basic purposes:
Data Collection and Analysis
Data is the goldmine of information about trading. The most experienced investors understand the skill to seek reliable data sources, collect information, filtering for authenticity and perform useful calculations.
In the same manner, CTBs are a great tool for automatically collecting every possible data resource available on the internet using keywords. The average of the data stream from thousands or hundreds of sources is more efficient than using a single data aggregator.
Investment Risk Prediction
The risk management quotient is equal to the profitability of an investor. The more an investor can predict investment risks, the better their chances of turning a profit increase.
Even the most experienced investors are plagued with psychological bias and are prone to human errors. Therefore, CTBs can amplify the ability of an investor to calculate related risks by many folds and they can also minimize the margin of error significantly.
Traditionally, cryptocurrency investor needs to perform all their trades by keeping an eye on all market changes 24/7. With a CTB, these investors can use their time effectively for other activities while the bots can make all the selling and buying decisions automatically.
However, the investors need to specify the criteria for making these trades such as adding stop loss and setting price fluctuation limits.
Advantages of a Crypto Trading Bot
When most cryptocurrency investor hears about programming they might want to steer clear of this complicated trading option. However, CTBs can elevate the trading output for a cryptocurrency trader by many folds. Here are some of the major advantages of deploying a Crypto Trading Bot:
The error of margin for human investors and traders is always higher in comparison to computer programs. Therefore, CTBs investment decisions are going to entail a very negligible amount of trading mistakes.
However, it is important that these bots have access to authentic data sources and they are free from any programming errors.
At the same time, CTBs are also the most effective because they can remain operational even when the investors are sleeping or busy with other activities.
It is impossible to separate human investors from their psychological inclination. In many cases, even the most experienced investors can end up making huge errors in judgment based on their intuition or gut feeling.
In contrast, CTBs are free from any emotional stimulus and can make objective decisions only. Therefore, they are ideal for trading functions that require the calculation of data and conducting logical analysis of the market.
The computation power of a CTB is many times bigger in comparison to the human mind. Even when investors today are using digital gadgets and computation tools to increase their ability to navigate through a massive amount of data.
The human mind cannot keep up with the speed and efficiency of a CTB for data processing. Since cryptocurrencies are trading on an international scale therefore the market variables to affect them also become very fickle.
Therefore using a CTB is ideal for handling the extremely potent market dynamics.
CTBs are automated and they can keep operating even without any active input from the programmers. It means that the investors who have deployed CTBs do not have to keep an eye on every minor and major market fluctuation around the day. Therefore, automated CTBs also save a lot of time and hard work for cryptocurrency investors.
Limitations of Crypto Trading Bots
For any innovation, there is still room for further improvement. In the same manner, there are also some limitations attached to Cryptocurrency Trading Bots. By understanding these limitations, the investors can work towards adding better upgrades and using their CTBs more efficiently:
Hacks and Exploits
Hacks and exploits are the biggest enemies for a CTB. Hackers are always looking to launch malware to steal cryptocurrencies or collect data from investors.
With a technically compromised CTB hackers can find blind spots to invade the digital wallet accounts of the traders and steal their cryptocurrency reserves. Therefore, the investors need to make sure to patch all ends on their CTBs before deployment.
The cryptocurrency market is filled with variables since most investors are trading physically. Therefore, the dynamics of the market are not always very logical.
Under these circumstances, the bots are faced with a very massive amount of probabilities that are impossible to calculate in advance. Furthermore, the bots are not equipped to recognize every input present in the market and convert it successfully into viable data calculations.
Lack of Emotion
Making logical decisions for cryptocurrency traders is very important. Meanwhile, CTBs are always incapable of quantifying human emotions and making viable judgments. In the investment market, the value of an asset is always determined by its psychological expression of it among the investors.
However, the data collected from market polls is improving the ability of CTBs to become more efficient at grasping human psychological effects on trading and profits.
Regulations Concerning Crypto Trading Bots
Regulatory clarity regarding cryptocurrency trading bots differs from platform to platform and from country to country. In some regions, deploying cryptocurrency trading bots is legal and does not incite any regulatory action from the financial authorities.
However, it is also important to note that the technology is very new, and financial regulators are not worried about them for now because a vast majority of cryptocurrency investors are unable to use them or create them independently.
It is also worth considering that CTBs are mostly used by investors for personal trading ease and upgrading. However, in some cases, threat actors can use these bots for performing financial scams such as pumps and dumps.
At the same time, a private cryptocurrency organization or a financial corporation can ban its users legally from using any trading bots. In general cryptocurrency trading, bots are legal in countries like the USA because of the lack of any regulations around them.
Meanwhile, there are some countries such as Japan where CTBs are banned under government laws.
Cryptocurrency Trading Bots are the ultimate level to aspire for any cryptocurrency investor. By getting in line to learn about programming languages, investors can increase their understanding of the blockchain.
Furthermore, their grasp on financial and investment matters is also going to improve when they are trying to make a computer program learn logic for conducting automated trading.
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