Bitcoin Trading Bots: The Most Complete Guide
What Is A Bitcoin Trading Bot?
We have all seen the movie Back to The Future, read futuristic novels, and therefore know exactly how useful robots may be. Four or five decades ago, housewives were dreaming of machines that would help them wash clothes and dishes, sweep the floor, or clean the windows.
Men wanted to improve their cars or have something that would open and bring another bottle of beer from the fridge. Did that happen? Hell yeah!
Now traders all over the world pin their high hopes on bots, little robot siblings, which could make even the laziest or most inexperienced trader a millionaire. However, is this piece of code really able to bring profits without any mistakes? We doubt it.
Still, automated crypto trading has become really popular and this is a trend we can’t ignore.
Basically, a Bitcoin trading bot is an algorithm for automated trading. The bot bases its decisions on a variety of market factors and indicators, relying on fluctuations in Bitcoin price.
The Bitcoin bot analyzes and evaluates all the orders, volumes of trading, asset prices, and follows all the important market actions. The most valuable feature of this bot is its immediate reaction to all the possible market changes.
This means that they can make decisions on whether to buy or sell currency at the same speed that Barry Allen is able to run a marathon!
However, you should remember that not all Bitcoin bots are equal. Some of them are amazing, while others are simply a poor substitute for a quality algorithm.
In addition, they are not real people and should be regularly controlled and checked as to whether they are following the chosen strategy and plan.
So if you want to get a Bitcoin day trading bot, it is not enough to just choose the most popular one. You should still be able to understand market mechanisms and fluctuations.
Today we will talk about how these bots operate, their advantages and disadvantages, and will try to distinguish how the best Bitcoin trading bot should operate!
How Do They Work?
Bitcoin trading bots use different tools, algorithms, and methods. However, the easiest and one of the most popular ones is Arbitrage. The main feature of this algorithm is that it motivates the Bitcoin trading bot to buy the order at one price and to sell it at another.
On most of the listings the same order may differ in price, so these bots can make instant profits simply by buying and selling those assets without delay. The quantity of possible profits mainly depends on the fluctuation of the asset. For example, the lower the fluctuation is, the smaller the earnings will be. However, when the market is more unstable, with a proper approach the Bitcoin bot can hit the jackpot!
However, a bot’s arsenal is not limited with Arbitrage. They are also able to create markets and make huge profits. Simply by constantly buying and selling orders close to the market price, the bot is able to reproduce activity on the market.
A Bitcoin day trading bot will automatically gain profits from these orders. To get the maximum out of this sort of approach, bots rely on asset liquidity.
Have you already booked a personal island on Airbnb after learning that Bitcoin trading bots can do this magic?
Types Of Bitcoin Trading Bot Strategies
Automated Bitcoin trading is all about algorithms, rules and strategies. It is not about impulsive decision making or luck.
That is why there are a variety of different strategies; depending on which you choose to pursue, you can likewise choose the most suitable Bitcoin trading bot.
These strategies include:
1. ArbitrageThis strategy was discussed above and is definitely one of the most popular among traders. Arbitrage benefits from the difference in price, because markets may have different prices on the same order or exchange.
This means that the bot (and the trader behind it) will buy an asset on a certain exchange and then resell it on another.
Unfortunately, this strategy has begun to lose its superiority because exchanges no longer have such a big price difference. Markets have become more equal, making it meaningless to apply the Arbitrage strategy.
2. Market MakingThis strategy is clear as day: to make profits off of market fluctuations, bots constantly buy and sell different currencies and derivatives. So, what does the best Bitcoin trading bot do when applying the market making strategy?
It places a limited quantity of orders close to the existing market price (both for buying and selling). When time passes, the price of this asset changes and the trader gets a profit from the fluctuation.
3. Trend TradingA next generation Bitcoin autotrader is able to make decisions based on market trends. Speed and timely action is the basis for making profits, so trading based on trends is one of the best strategies that can be applied.
How does this work? Trading bots analyze market situations in a chosen direction. When the prices are going up, the trader may enter the long position; when they are going down, the short position can be chosen.
4. Rebalancing of the Index FundFrom time to time, index funds conduct a so-called rebalancing, which helps to adjust their holdings to the accepted basic indices. This moment is a great opportunity for a Bitcoin trading bot: it can capitalize on predicted trades, which offer up to 80 basis points worth of pay-off depending on the quantity of index fund stocks. And, all of this happens before rebalancing.
5. Mean ReversionThe main idea of this strategy is that every asset has a stable price trend behind it. So, even if the price of the asset changes, it will eventually stabilize around the trend. This price can be called the mean average of a particular currency or asset.
When applying this strategy, a Bitcoin bot will be able to buy or sell assets presuming that the price will eventually drop or rise to its average mean.
6. Strategies Based on Mathematical ModelsThe best Bitcoin trading bot is the one that puts safety first. That is why all the popular strategies based on mathematical models trade on option combinations and their security.
One of these strategies is called delta-neutral. This is a strategy that consists of several positions and the offsetting of both positive and negative deltas – an indicator that compares the change of an asset price and its derivative. Eventually, the delta of the analyzed assets must equal zero.
7. Volume Weighted Average Price (VWAP)When this strategy is used, it means that a big order is broken up into pieces and its smaller parts are released based on the historical volume of specific profiles.
Thus, the main goal of a Bitcoin robot is to complete an order and that the price will be close to the weighted average.
8. Percentage of Volume (POV)Before the order is 100% filled, Bitcoin bots, using the POV strategy, proceed with sending sectional orders based on the participation ratio and depending on the volume that is already traded on the market of interest.
The ‘steps strategy’ sends orders at a market volume percentage (defined by the user) and increases or decreases this rate of participation when the price reaches levels indicated by the user or Bitcoin day trading bot.
9. Time Weighted Average Price (TWAP)With the help of this strategy, Bitcoin trading bots break up a big order into smaller parts and release them on the market using equally divided time periods (from the start to the end of the deal). The goal is to complete the order at an average price and to minimize the influence on the market.
10. Shortfall ImplementationUsing this strategy helps to minimize orders’ execution costs simply by trading in real time, as well as getting benefits from the alternative cost of the delayed performance. When the price moves in a favorable direction, the participation price will increase; when the price moves the other way, the price will decrease.
Thus, a Bitcoin trading bot will always know which direction to go in. Genius!
What Are The Advantages And Disadvantages Of Bitcoin Trading Bots?
Bitcoin bots, as well as humans, have their dark and bright sides. Want to find out what they are? Continue reading!
Advantages
Advantages of the best best Bitcoin trading bots:
- Trades are completed at the best price;
- Trade orders are placed accurately and on time, which leads to the highest execution chances;
- All the trades have perfect timing, which helps to avoid significant changes in the price;
- Transaction costs are reduced (for example, as described in the Shortfall Implementation strategy above);
- Complete automatic checks under different market conditions;
- No manual errors when placing an order;
- Every strategy can be compared and tested on any real-time or historical data;
- No mistakes based on a psychological or emotional factor. Bitcoin bot is an algorithm, after all!
Disadvantages
The disadvantages of a Bitcoin trading bot first of all depend on how experienced in crypto trading the user is.
For example, if you overhear in a subway that the Bitcoin price is going up and you decide to learn how to trade using a crypto bot, the bot itself will become a drawback.
Remember, to trade with the help of a bot, you need to have enough trading experience behind you to be able to understand how Bitcoin trading bots work and what they have to offer.
If you are an experienced trader, disadvantages are quite common – as with any software or program, the bot may stop responding or will simply fail to operate correctly. Any mistake may lead to losing money!
This is why trading bots can be more of a risk than using signals from crypto providers, because they are impossible to control. Do you feel the approaching invasion of robots?
How Can You Know You Will Gain Profit With The Help Of A Bitcoin Trading Bot?
The first rule is: there are no guarantees!
As you can see from the above flaws of a Bitcoin trading bot, literally anything can lead you to losing your time, money, and proper sleep.
Of course, many bots provide reports on the results of all orders that have been completed. With their help, you can see how profitable these bots are, when to expect revenue, and so on. However, you can’t be sure that everything will work out the same way in your particular case.
Luckily, some of the bots offer a trial version (usually ranging from three days to a month). This means that you will use a free Bitcoin trading bot and will be able to make up your own mind regarding its effectiveness and results.
Can Bitcoin Trading Bots Scam People?
It is clear as day that anyone and anything can scam us. This is why any Bitcoin trading bot can trick you out of money just the same as providers of crypto signals can.
Even if you have already lost your head because the chosen free Bitcoin bot operates flawlessly, the system looks appealing and professional, and the support team is answering all of your questions – it doesn’t mean a thing!
If you decide to use trading bots, it is necessary to check them thoroughly. You at least need to surf the internet and check whether this bot has been spotted in scams and doubtful operations, and try to find all the available reports (real,not promotional, ones).
Conclusions
If you think that a Bitcoin trading bot is your chance to make money while you are at the office or relaxing by the pool, it is better to look for another option!
Bitcoin bots that promise 100% guarantees and work without your interference are most likely scammers, so you will only lose your time and money (and will get additional white hair!).
To remain on the safe side, you need to choose bots that require certain trading parameters, based on which trading will be conducted. Only by adjusting all of them can you get the expected result.
Trading cryptocurrency is a constantly changing environment, so you need to react quickly to all the changes and improvements by updating your expectations and adjusting the selected strategy.
This is why you need to use a Bitcoin trading bot only for a limited part of your capital and only if losing this sum will not be a big problem. Remember, it is always more risky to trade through a bot than to trade on your own.
Once again, let us emphasize the importance of getting familiar with the basic principles of crypto trading if you are only getting started! You can get all the necessary information here.
Make some tea or coffee, click the link, and get the latest data on crypto trading that will make your experience as safe and positive as possible!