What's the Role of Bots in Crypto Trading?

Cryptocurrencies are known for being incredibly volatile, with prices fluctuating dramatically even in the space of minutes. Investors also have the opportunity to take part in cryptocurrency trading around the world and at any hour of the day. Combined, these factors limit the effectiveness of human cryptocurrency trading in several ways.

First, investors in many cases cannot react quickly enough to changes in price to achieve the optimal trades that are theoretically available to them. Slowdowns in exchanges and transaction times further exacerbate this problem. Second, investors can simply not dedicate as much time to the cryptocurrency markets as necessary to always achieve the best trades. Doing so would require round-the-clock monitoring of cryptocurrency exchanges all over the globe.

Fortunately for many investors, there are solutions to these issues. One of the primary solutions is bots, or automated tools that conduct trades and execute transactions on the behalf of human investors. Certainly, bots are a controversial component of the market, and there are justifications for using them just as there are reasons for doing away with them entirely.

Types of Bots

There are many varieties of cryptocurrency bots. One of the most popular types is the arbitrage bot. Arbitrage bots are tools that examine prices across exchanges and make trades in order to take advantage of discrepancies. Because the price of a cryptocurrency like Bitcoin tends to vary somewhat from exchange to exchange, bots that can move fast enough can beat exchanges that are delayed in updating their prices.

Other types of bots use historical price data to test out trading strategies, theoretically offering investors a leg up. Still, other bots are programmed to execute trades at particular signals such as price or trading volume.

How Bots Work

Investors can subscribe to free bot programs to aid in their cryptocurrency trading. On the other hand, many bots have user fees, some of which can be quite steep. Typically, investors seek out the bot or bots that will be most useful for them and then download the code from a developer. Each bot includes different requirements in terms of software and hardware.

Bots can be incredibly helpful, although there remains an ongoing debate about whether they should be permitted in cryptocurrency trading. In order to maximize the impact of a bot, however, an investor must know how to best utilize the tool. For instance, investors must have the proper accounts set up across digital currency exchanges.

They must stock those accounts with cryptocurrency holdings. In many cases, they must still make investment decisions such as when to buy or sell. A crypto bot is not a get-rich-quick solution for an investor unwilling to put in the time and effort necessary for success.

Downsides of Using Cryptocurrency Bots

In terms of the issues with cryptocurrency bots—first, many bots only provide marginal returns (even when operating correctly). Second, many bots are simply not designed well.

Third, and most importantly, successful utilization of a bot requires a deep knowledge of the digital currency markets and an excellent supporting investment plan. For some investors, a bot can be a useful tool to aid in their cryptocurrency trading. For others, though, by the time they've done the work to prepare themselves to adequately use a bot, they may no longer require its services.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.