Most of you have heard of the fantastic x10 to x50 profits traders achieve in the crypto market. Since this industry is highly volatile, the sky’s the limit to how much you can earn or lose on trading activities. But with modern technology, things are getting simpler and more manageable, and this article will help you understand how automation works to your benefit in the crypto trading industry.
Introduction to Crypto Trading
Cryptocurrencies took the world by storm around a decade ago, giving many early adopters crazy profits and introducing the global community to the concept of decentralized, non-supervised currency options. The present-day transaction value in the global crypto market constitutes around $1.3 trillion, and the industry exhibits a mind-wracking CAGR of 30%+. The global crypto trading market has exceeded the $5 billion mark in 2023, and its future is optimistic, regardless of the long-term crypto winter of 2022-2023. With such figures in mind, you can definitely see that the sphere of crypto trading is poised for growth, promising huge gains for people who have a strategy and can manage risks.
Yet, one should understand that the crypto market differs profoundly from the traditional stock market. Here, advanced technology rules everything, including trading activities. This is where crypto bots come into play. A crypto bot is a piece of software, or algorithm, that performs automated operations in the crypto market on behalf of its owner. Most modern bots are AI-powered, which ensures their fast decision-making based on fuzzy, quickly changing sets of indicators.
How Do Crypto Trading Bots Work?
In a nutshell, a crypto trading bot is an algorithm that performs specific trades based on pre-programmed indicators and parameters. Some bots are very simple, while others are expensive and complex. The programmer feeds a set of criteria for trade execution into these algorithms, and the latter scan the market data until they find the proper combination of factors to execute a sale or purchase order.
Key Benefits of Using Cryptocurrency Trading Bots
Buying or building a cryptocurrency trading bot is a wise decision for anyone wishing to automate their operations or test their new trading strategies with the help of backtesting.
- Speed. Bots can perform dozens of operations per second, which a human being can’t do. That’s why they can earn decent profits without the need to stick to the monitor 24/7.
- Freedom from emotions. Human traders often perform emotional trades that contradict common sense; bots are free from emotions and base their decisions only on cold, hard facts.
- Automation. Bots don’t need to eat or sleep, so they can operate round the clock to gain profits while you are enjoying your life.
- Comprehensive market analysis. Since most bots are AI-powered, they can conduct instant analytics of a huge number of market factors in real-time and make trades based on the latest updates.
Main Crypto Trading Bots Strategies
Strategy is key when you’re considering an AI crypto trading bot. There are many popular strategies you can explore (we’ll talk only about the legal ones):
- Scalping. Scalping bots make a huge number of trades with tiny price differences and earn profits on the natural price volatility. This solution can be effectively realized by building a Bitcoin trading bot for one of the most popular exchanges with good liquidity parameters.
- Reversal trading. These bots monitor early signs of trend reversal and make trades opposite to the current trend.
- Momentum trading. Momentum means a strong price direction (upward or downward), which bots use to make trades in compliance with that trend.
- Arbitrage. A crypto arbitrage bot detects price differences for specific assets on various platforms and conducts cross-platform arbitrage with a decent ROI.
- Market making. MM bots earn profits by using the price difference between sell and buy orders; the strategy works best with low-volatility assets.
- News trading. These bots scan the news feeds to identify potential price drivers and make trades based on those expectations.
New strategies emerge every day as creative traders figure out some new patterns and monetize them. So, you should stay alert to the industry’s updates and incorporate new strategies for greater gains.
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How to Build a Crypto Trading Bot?
As soon as you decide to build a crypto trading bot for yourself, you have two options:
- Buying or renting a ready-made bot (or downloading some free, open-source version available online).
- Building a customized bot with the help of qualified developers.
The first option is definitely quicker and much more affordable (sometimes even free of charge). Yet, open-source bots are used by many people, so they will hardly give you a decent ROI. Some may even come with malicious code and serve as hackers’ tools for eliciting your crypto assets and confidential data. So, it’s important to exercise extra caution when dealing with such free and readily available bots online.
The second variant is longer and more expensive, but it has a higher chance of paying off with good profits because it will have a unique configuration of settings and will fulfill your individual strategy.
The process of trading bot development involves many vital steps and requires the participation of a qualified programming team. Here are the main stages your project will need to go through before your product is ready for automated crypto trading.
#1 Choose the Programming Language
You actually have many options when selecting the programming language or a mix of technologies for crypto bot design. Modern developers rely on Python, Perl, C, and JavaScript to create crypto bots of any complexity level. Rust is also among the developers’ favourites, as it’s very quick and functional for the bot creation task. Thus, you should determine the language you need and then find a qualified developer or team to help you bring your idea to life.
#2 Set up an Account on a Crypto Exchange with an Open API
Since a crypto bot can’t operate in a vacuum, you need to set up a user account on a crypto exchange where you’re planning to conduct automated trades. You should do this in advance, as most platforms require users to go through the KYC procedures before they get access to the full functionality. Always double-check that the platform has an open API, which allows bot integration; some platforms ban such practices and don’t provide API connectivity to prevent algo-trading.
#3 Select a Trading Model
We’ve considered several trading strategies above, and each of them requires a separate bot. So, you should pick the sphere of your specialization and set the technical task for the team based on the operations you want the bot to perform – whether it will be arbitrage, market-making activities, or trend compliance.
#4 Build the Bot’s Architecture
Now, it’s time to get down to some math. Your bot’s architecture is its brain – the algorithmic model that will determine what the bot does and whether it completes a trade. At this stage, you should create the full logic of your bot’s decision-making and set the list of parameters by which it will be guided.
#5 Develop the Bot
The next step is coding. Your development team will work on the bot based on your specifications, and the final result will be a piece of software ready for testing.
#6 Backtest the Bot
Once the bot is ready, it’s time for testing. You should test the software several times – first to see whether it really acts as it should and matches your strategy. Next, you should check how it handles risk and what returns it gives in relatively stable and volatile conditions.
#7 Deploy the Bot on a Live Account
As soon as you get satisfactory testing results on all points, it’s time to launch your bot for fieldwork. But don’t just deploy it and hope to get stable returns without interference; as with any other algorithm, your bot will require continuous fine-tuning to perform well.
Things to Consider Before Creating a Crypto Trading Bot
Once you decide to make a crypto trading bot, it’s time to plan everything in advance. This way, you will ensure that you are getting what you expect and will save money otherwise wasted on irrelevant features or technologies.
- Always adopt a serious technical approach – find a reliable dev team, select the best technology mix, choose a safe cloud platform, consider cybersecurity issues, etc.
- Make a plan. You should have a detailed roadmap that will guide both you and your developers, giving all of you the essential milestones and schedules for progress tracking.
- Mind the programmers’ qualifications. It’s important to find the right people with relevant expertise to build a bot that will work properly.
Best Examples of Cryptocurrency Trading Bots
While the market for crypto trading bots is really huge, we can distinguish several successful examples that illustrate the progress of this technology.
Sniper bot
A sniper bot, also known as a sniping bot, is a piece of automated software programmed for placing a first-second bid on a digital auction or a crypto trade. The speed of sniping guaranteed by modern technology ensures that the bot makes the final bid after considering all other bids and outperforms the rest of the bidders. It is also a DEX bot that performs trades with high precision and closes a deal only when a predetermined set of conditions is met.
Copy Cat/Copytrade Bot
These bot types are the simplest examples of back running bot technology, as they find profitable traders online and replicate their trades with a relatively quick speed so that the output of the trade is as identical to that of the copied market participant as possible. For instance, you can launch a Uniswap trading bot to mimic the activities of other successful traders on the platform.
Sandwich bot
As the name of this bot suggests, it gives you profits by quickly monitoring the thread of sell and buy orders on crypto platforms and executing trades ahead of the next trade in line. This way, the sandwich bot may be regarded as a front running bot, stealing traders’ profits by substituting the best available price and giving the trader no time to adjust their trade settings.
Telegram Crypto Trading Bot
As Telegram is getting increasingly crypto-friendly, many bots have emerged to help users trade cryptocurrencies on various exchanges. You should provide your API to connect their accounts to the Telegram trading bot, and it will start trading instead of you. It’s also possible to set up a Telegram crypto alert bot that will send you notifications about specific asset prices, news, or events. Thus, overall, Telegram bots are highly convenient as simple and easily accessible solutions one click away on your smartphone.
Future Trends in Crypto Trading Bot Development
Blockchain technology is advancing in leaps today, with unthinkable innovations occurring every day. So, what is in store for the crypto trading bot industry in this swiftly changing world? Here are the main trends you should take seriously:
- More automation. As AI and ML are integrated at a faster pace in modern trading systems, the bots of the future are expected to showcase better adaptivity, complexity, and sensitive sentiment analysis. Check out the uses of Chat GPT for crypto trading to see how AI goes hand in hand with this industry.
- Wider market penetration. Bots are entering all spheres of trading and enabling automated activities in many financial markets. Their use is expected to spread from crypto platforms to traditional stock markets, DeFi projects, and other financial spheres.
- Robust risk management. While modern bots are still not that flexible in risk limitation, future bots may come with more sensitive risk adjustment functionality that will shield the owner from volatility.
- Smarter arbitrage. A smart and effective cross-DEX arbitrage bot is gradually becoming a reality. Bots are currently used for cross-platform arbitrage, but new technologies can improve their ROI and address the present-day inefficiencies.
Conclusion
The crypto bot industry is developing pretty fast as demand for automation grows and market participants embrace AI/ML advantages. Thus, bots rule the trading world, and the winner is the one who develops a great strategy for profit maximization.
If this technology is of interest to you, welcome to 4IRE for blockchain consultancy and detailed project estimation. We have experts who can design a trailblazing copy trading bot or DEX crypto bot of any complexity for you, giving shape to your strategy and allowing its rigorous testing.
