The Bitcoin (BTC) market never sleeps, thanks to cryptocurrency trading bots. But what are Bitcoin trading bots and how do they work? And, more importantly, what does the increasing popularity of automated trading mean for human cryptocurrency investors?

AI (Artificial Intelligence) and people alike will determine the future of blockchain and Bitcoin price. In other words, you need to know what the robots are doing and how to use them. Make sure you use Bitcoin trading bots the same way you would invest without them: Do your own research and consider your own finances before deciding where and how to spend your money.

What Are Cryptocurrency Trading Bots?

What are cryptocurrency trading bots and why should they matter to human investors? In essence, these robots are software that can trade on your behalf. They buy and sell your cryptocurrency based on market data and preferences you’ve pre-selected.

Trading Robots Are Common in Finance

Trading robots are nothing new. JP Morgan calculated that 90% of stock trading is algorithmic. This is done using software also known as “trading robots” or “expert advisors” (EAs). The advantage is that these robots can trade more quickly than humans and can provide access to a stock market order books that you may not otherwise be able to see. Conversely, stock trading robots can be unreliable, require near-constant monitoring, and cost a lot.

For example, a Bloomberg Terminal, one of the most widely used financial applications, costs $24,000 annually, according to Quartz. This program combines real-time security prices with news updates and other useful financial information.

Bitcoin trading bots follow the same principle: They can trade on the cryptocurrency market while you’re working or sleeping. But unlike stock trading robots, they’re generally less expensive, or open source and completely free.

Types of Bitcoin Trading Bots

Cryptocurrency Trading Bots: What They Are and How They Work

Whether you’re looking to automate your USD/BTC buys or those of a different cryptocurrency, you should know the difference between cryptocurrency trading bots. Most importantly, some are free and others are not.

Free and Open Source Robots

One example of a free cryptocurrency trading bot is Gekko, an open-source plugin that functions with Bitfinex, Bitstamp, and Poloniex cryptocurrency exchanges. Mike van Rossum, the developer behind Gekko, explained to Blocklr in an email:

“Gekko is all the software you need for a trading bot, except for the ‘secret sauce’ (called ‘the strategy’), which is the part of the bot that does the decision making on when to buy and when to sell. Most serious Gekko users create their own strategy and than use Gekko to simulate/test/develop and run the bot.”

Specifically, Gekko looks at an exchange—take BTC/ETH, for example—and can forecast how a certain investment strategy would work over a specific length of time. You can set up Bitcoin trading bots like this one to independently initiate exchanges.

According to Gekko Plus, an upcoming Bitcoin trading program, Gekko, the original, open-source trading project, is the fifth most popular Bitcoin project on Github. In other words, cryptocurrency trading bots are widespread, especially among advanced traders.

Cryptocurrency Trading Bot Software

These are for investors who do not want to build their own trading algorithm, but who still may want high levels of bot customization. There are several types of cryptocurrency trading bots available with monthly fees.

For example, 3Commas is a platform on which you can see trades from all your cryptocurrency exchanges in one place. Additionally, they offer two types of cryptocurrency trading bots: simple and composite. Stanislav Zakharov, Head of Customer Relations, explained to Blocklr:

Simple bot controls one pair, the composite one controls multiple pairs […]. For example, you have enough funds for three trades at the same time but like to trade 20 different coins; Then the composite bot will allow you to start three trades for coins selected from the list.

Choosing which cryptocurrencies you’d like to trade is only the start of what cryptocurrency trading bots can do. You can set limits for when your bot initiates trades, how much you’d like to make per trade, how your bot should calculate profits/losses, and so much more.

How Trading Bots Work

How does automatic cryptocurrency trading actually work? Above, you can see some of the possible settings for Bitcoin trading bots. This is one of 3Comma’s pre-customized bots; You can customize everything from scratch if you’d prefer.

Cryptocurrency Trading Bots: What They Are and How They Work

Specifically, this is a long investment strategy simple Bitcoin trading bot. Here’s what each numbered or lettered element means:

  1. Name: What you choose to call your bot.
  2. Exchange: The account on which this bot is trading.
  3. Recommended Pairs: For this bot, they recommend exchanging BTC/MDA and others.
  4. Pair: We’re exchanging BTC/ETH.
  5. Strategy: This bot isn’t programmed for short, day trades but for longterm investment. They have different algorithms for each.
  6. Profit Currency: Profits will be shown in the second currency in our pairing. In this case, ETH is the “Quote Currency.”
  7. Base Trade Size: The size of a trade’s start order.
  8. Safety Trade Size: The average size of the orders that follow the start order.
  9. Target Profit (%): The amount the bot should make per deal, after factoring in exchange fees.
  10. Take Profit Type: “Percentage from Total Volume” means that the trade profit increases as the volume increases. The other option is “Percentage from Base Trade,” which means that the bot will disregard trade volume.
  11. Max Safety Trades Count: The bot can only make this number of safety orders in one deal.
  12. Max Active Safety Trades Count: Total number of safety orders the bot will keep open at one time.
  13. Price deviation to open safety trades (% derivation from initial trade): To initiate a safety trade, the price for the following trade must be this percentage higher.

If you’re new to Bitcoin trading bots, you can choose a bot based on your trade strategy (long vs. short). Additionally, you have to decide between simple and complex: Do you just want to only trade BTC/ETH, or different pairs, too?

Keep in mind that some bots will use amounts larger than what you have on your exchange. Make your own investment decisions and do not leave your bot unattended for long stretches of time.

Investment Strategy

As mentioned earlier, you first need to determine your investment strategy. Let’s start with the difference between day trading and investment holding, or HODLing.

Day trading is when you buy and sell something within a day. It depends on short-term changes in price. Cryptocurrency trading bots can be especially useful for day trading since they can make rapid exchanges 24/7.

Long-term holding is called hodling in the cryptocurrency market. This is exactly what it sounds like: You hold on to a cryptocurrency in hopes that it will “moon,” or increase in value.

Cryptocurrency-Specific Strategies

Those above approaches apply as much to securities as they do to cryptocurrency. However, there are more strategies you can apply to cryptocurrency trades.

Arbitrage is when you buy cryptocurrency on one exchange only to sell it on another. For instance, Bitcoin price was 43% higher in Korea than it was in America in January 2018. This is when seeing different cryptocurrency exchanges at the same time via a cryptocurrency trading bot is useful.

Market Making is another common trading strategy. This is when a trader initiates limit orders, meaning a request to buy/sell cryptocurrency at a specific price. In essence, market making traders try to buy low and sell high. They make the bid-ask spread: the difference between a transaction’s highest and lowest prices.

A Bitcoin trading bot comes in handy for a market making strategy because it can continuously place limit orders. Plus, speed is advantageous because cryptocurrency trading, especially Bitcoin, is increasingly common.

Investing with Bitcoin Trading Bots

Cryptocurrency Trading Bots: What They Are and How They Work

Cryptocurrency trading bots take full advantage of the 24/7 market. With the ability to access data from multiple exchanges and adhere to predetermined investment strategies, robots can make informed trades faster and more frequently. Robots are so prominent that there are even cryptocurrencies built on AI platforms—and they’re doing well.

However, just because you can automate cryptocurrency trading doesn’t mean you can (or should) remove yourself from the process. Whether you’re creating your own algorithms for Bitcoin trading bots or choosing settings, you have to know a lot about the cryptocurrency market and your own finances. For starters, how do exchanges like Coinbase calculate trading fees?

Even for the most casual crypto investor, it’s important to remember that cryptocurrency trading bots are out there, and they can be a lot faster than you.