Cryptocurrency trading with bots

What are trading bots?

These are simple programs that monitor the state of the market and execute trades based on predefined algorithms, allowing automatic and high-frequency trading.

Traditional financial markets have been using similar programs for decades, so much so that it is believed that approximately 70 percent of the stock market is controlled by automation. Basically, a trader creates a program that follows a specific trading strategy, which then monitors the market situation 24/7. Of course, this requires both a sensible strategy and a favorable market condition, but if both parameters are present, then this means that traders no longer need to monitor the state of affairs around the clock to maintain their positions.

In addition, computers react to changes in the situation thousands of times faster than humans. This opens up space for so-called “high frequency” trading, which is not available to most users.

And all this fits perfectly into the concept of a fully digital cryptocurrency market. So it is not surprising that trading programs have become very actively used on it.

What types of bots are there?

Technically, as many potential economic strategies exist, there will be as many programs for them. But in practice, the most common ones are: trend, arbitrage and scalping bots.

Trendy. They do the same thing as ordinary traders - they calculate trends and try to make a profit on it. Based on the direction of the market movement, they buy or sell assets when it is theoretically optimal. They use mathematical models and actual market data, so they can fail if the model is poorly thought out. But if everything is set up well, then trend bots often outperform ordinary traders in efficiency than they are inferior to them.

Arbitration. They are trying to make a profit by exploiting price discrepancies on different exchanges. They track the price of one asset across different platforms and if they find a discrepancy, they buy where it is cheaper, forwarded and sell where it is more expensive. The problem is that, although such differences can be quite significant, they do not last long. And, to be honest, the popularity of arbitrage bots has significantly reduced the frequency of such "arbitrage opportunities" and to some extent equalized prices in different markets.

Unlike threaded bots, scalping bots perform better in sideways markets. They work with bid and ask price spreads by buying what's at the bottom and selling what's at the top. And let the size of the spread reach a few cents, due to automation and volumes, this allows you to get a decent profit, practically without risk. This is what makes scalping bots so popular among those traders who rely on automation. But just like in the case of arbitrage systems, their popularity has led to a significant reduction in the discrepancies between spreads, so now only the fastest systems can receive at least some serious profit.

What makes the market attractive to algorithmic traders?

Many elements of cryptocurrency trading are compatible with trading bots. This is facilitated, for example, by 24/7 operation and smaller trading volumes.

Also, using digital asset trading software is a pretty logical choice. All transactions are carried out online, and many are also fully automated. And if you set up an automated system to properly interact with such platforms, you no longer have to worry about missing out on an opportunity that could happen at any moment.

Trading volume is also quite an important parameter. The fact is that the smaller it is, the easier it is, purely due to speed, to try to start dictating your conditions to the market. Alas, a person cannot compete in the reaction speed of an automation with correctly tuned algorithms. on large stock markets, their influence is almost imperceptible, including due to competition with other bots. And small cryptocurrency markets are extremely volatile in the face of such impact.

As for arbitration programs, in principle they pursue the most simple goal - to make a profit for their owners in any programmed way. And they have a lot of opportunities for this. So, for example, according to data from 2017, there were differences in price between the American and South Korean exchanges of up to 30 percent. Due to many parameters, but also due to inconsistent regulations on the part of governments. And in such situations, arbitrage bots turn out to be really effective.

The positive impact of bots on the cryptocurrency market

There is no doubt that trading programs are of great benefit to their owners. But it is useful for the market as a whole, as it makes it more inclusive and provides much-needed liquidity for work.

Inclusiveness. If earlier the use of trading programs was the prerogative of exclusively large financial institutions, now they are available to individuals. And this smooths out the existing economic inequality, attracting ordinary users to participate in the auction. It also makes the system more efficient overall, according to proponents of “high frequency trading”. They smooth out price fluctuations, since automatics find them much faster than people. Over the past few years, the value of price spreads has noticeably decreased on most cryptocurrency exchanges - many associate this with the use of bots.

Liquidity. This is the presence of a large number of buyers and sellers in the market, which instills in the trader the confidence that he can conclude a deal at any time and at a favorable rate, if only he wants. And one of the most important sources of liquidity is market makers, who place orders for both buy and sell through the bid-ask spread and profit from the difference. And if this is done in high-frequency trading mode, it will not only increase profits for all parties, but also increase the overall liquidity. And the higher it is, the greater the chance to attract large institutional investors to the market, operating with gigantic amounts and volumes. However, there is a certain difficulty in this - countless bots, "pouring" money among themselves - this is a classic "kitchen", due to which only their owners benefit.

Negative consequences

While trading programs can be extremely effective in the hands of many traders, they can also be manipulative. For example, for "pump and dump" scams or for malicious influence on decentralized exchanges.

Manipulation of exchanges. A series of bots, as mentioned, can help attract additional liquidity and improve the customer experience. But if it is they who carry out the vast majority of transactions on the exchange, then this is an alarming signal. "Simulated real trading", also known as "kitchen". In traditional markets, this is illegal, which cannot be said for cryptocurrencies. Moreover, on some exchanges, automated trading volume reaches an impressive 95 percent.

Another problem is when HFT bots start charging higher fees to ensure their trades are prioritized. And ordinary traders simply do not keep up with them because of the speed of their reaction.

Pump and dump fraud. With the help of bots, scammers are able to pretend that this or that coin is entering the beginning of a bullish trend. With real and actively traded assets this is impossible, but with small coins it is very real. And when other traders see growth, a self-sustaining process can kick in. Very often, scammers combine a “pump” with a social media company to further fuel the buzz about the asset. And when the price of a coin reaches a certain level, fraudsters sell it trite to everyone. They then discover that the specially inflated bubble is not supported by anything real, so the price is rapidly collapsing.

Also, "flash crashes" - "cascading crashes" can become a problem. This is a situation when a sudden price decrease provokes a whole series of bots to urgently sell an asset, causing a reaction from other trading programs and a "cascading fall". In May 2010, something similar happened in the stock market. Then the Dow Jones fell 1000 points in just a few minutes. Then, of course, the culprit of this process was found, but the losses were very significant. And this happened in a large and fairly stable traditional financial market - the consequences for cryptocurrencies will be much larger.

Unfair advantage of institutional clients. Institutional representatives also actively use bots for trading, but at the same time, they can have a huge advantage over retail traders. The fact is that many exchanges offer the colocation service - this is when a company gets the opportunity to rent part of the exchange's servers in order to get a direct connection to the system. This gives an unconditional advantage in the speed of work, even compared to other bots. Yes, it is quite expensive, but institutional investors can afford it.

How to join this process?

If you think that using bots to make deals is a good idea, then you should study this process in more detail. There you will surely find descriptions of the many trading strategies and programs that provide them. And if this does not seem very effective to you, you can create a strategy and a bot for it yourself. But this is an option for those who are well versed in both programming and stock trading.

It is better for a beginner to ask for help from services that purposefully deal with trading bots. However, they will have to tell them what they are going to trade and where, after which the system will offer them a number of strategies and bots for them, taking into account the current market conditions. The most popular such projects are Cryptohopper, 3Commas and TradeSanta. What's more, some of them offer a free trial for their tools.

By using bots created by professionals and taking some time to understand exactly how they work, traders have a lot of potential to conduct trades more efficiently. Of course, like any instrument, trading programs do not guarantee success, but they can make trading much more profitable. So their relevance will definitely not diminish in the near future. Rather, on the contrary, the state of affairs in many cryptocurrency markets will be shaped by automated trading programs.