Crypto Trading Bots Introduction

A trading bot is simply an automated program that performs buy and sell orders using algorithmic conditions reacting to current market conditions. Trading bots don't just apply to crypto, however, crypto is a great asset class to use trading bots in given its volatile nature. Crypto exchanges, unlike those used for stocks and most other assets, are open 24 hours a day and 365 days a year. As such, crypto trading bots never have to stop working so you can always make income, even in your sleep.

Bots, in general, perform repetitive tasks on the internet and it is estimated that over half of all the activity on the internet is currently performed by bots. These bots are computer programs that use AI (artificial intelligence) that is based on pre-set conditions made by a user.

As my user name might suggest, I mine cryptocurrency. Or at least I used to. The thought of creating an on-going revenue stream was always appealing and is really what first got me involved with crypto. The problem is mining really isn't profitable anymore for small-time GPU miners like me given the rise in energy costs and Ethereum's move to a proof-of-stake mechanism. Once I saw that the end of mining was coming for me, I looked for another income source to replace it. Enter Trading Bots!

Why use crypto trading bots?

Trading bots use quantitative analysis and/or quantitative modeling to signal when to buy or sell an asset. They never get tired and have huge advantages over human traders both in terms of speed and the fact that they have no emotions. Being emotionless, bots are disciplined to a degree humans simply can't match and those emotions are what get human traders into trouble.

Trading bots are great at adding diversification to your portfolio. No need to put all your crypto eggs into one basket. Once you have a trading bot programmed, you can set them up to trade a number of different cryptocurrencies or even other assets if you are so inclined. In-other-words, you can turn one trading bot into multiple trading bots pretty easily by having them each focus on different coins/tokens.

Bots are not new as they have been used in the traditional financial world for decades. In the United States, bots run the vast majority of trades now being executed on Wall Street (around 80% of all trades). It is a proven technology that produces profits. Those profits, however, are largely dependent on how well you program them.

In addition to being a proven technology, bots can also be back tested so you can see how they perform before committing any capital. Because financial data can be pulled historically, you can test how a bot will do in virtually any asset class and in virtually any situation. Want to test bots in bull, bear and sideways trading markets - no problem.

How to use a crypto trading bot?

First you must select a bot to use but buyer beware, not all bots are created equal and we will go over some in a future article to be released this week. In fact, they are all quite different so you must decide to some degree how you want to trade crypto before choosing a bot. Once you have selected a trading bot, you must then authorize it to work on your preferred exchange using API keys (Application Program Interface). You can grant or remove the API key authorization at any time. 

Please note, in mining my biggest cost was electricity but in crypto bot trading you have trading fees as a major expense so choose your exchange wisely and factor in trading fees as a major decision point given the number of trades your bot will potentially perform.

Once you have a crypto trading bot and have it programed there are four things that happen with each trade:

• Data Analysis - well designed bots use machine learning to absorb and process data very rapidly.

• Signals - while processing data, bots use signals to identify when to buy or sell crypto based on set algorithms.

• Risk Assessment - once a signal is seen, the bots do a risk assessment based on preset parameters to determine how much capital to allocate to any given trade.

• Trade Execution - after the first three conditions are met and analyzed, the bot executes the buy or sell order on the exchange via the API keys.

What type of crypto trading bot is right for me?

Trading bots can be simple or complex and range from free to rather costly. You can use bots that are already out there or get real nerdy like me and program your own trading bots from scratch or using existing open source code using languages C, C++, Perl and Javascript, or something a bit easier like Python.

Before you begin to use a crypto trading bot it is important to understand that these are something that you just set up and forget. The set up itself can be quite complicated and once they are set up they do require monitoring and maintenance to make sure they are performing as intended.

In the next article we will look at some of the best trading bot strategies used to produce income. Once we identify some of the top strategies to base algorithms around, we will look at specific bots you can use to produce income yourself. If you are interested in making passive income using trading bots but don't want to mess with them yourself don't worry, next week I will cover a brand new way to utilize bots that I developed that is simple, smart, scalable and sustainable. Best of all, anyone can do it...stay tuned!