This program, also called a trading robot, uses machine learning (ML) and artificial intelligence (AI) to be able to trade better. The purpose of a trading bot is to generate profit for the robot’s owner.
Trading bots are used for various financial products. For example, trading in shares, forex, raw materials and cryptocurrencies. Crypto trading bots have become especially popular since the increase in crypto’s popularity since 2017. Since then, more trading bots have been developed, resulting in a very sizable offering.
In many cases, a crypto trading bot is used by people who themselves do not understand crypto trading. They prefer to outsource the trade in crypto to a robot that operates on the basis of algorithms. The chance that a crypto trading bot makes a loss in their view is smaller than if they themselves were to trade in crypto. Nevertheless, it is important to know that money can also be lost when using a trading bot.
How does a crypto trading bot work?
There are many different types of crypto trading bots, and each trading bot works differently. This is why some bots are more popular than others. For example, there may be a difference in the robot’s installation and therefore user-friendliness, but also in the returns that a trading bot can generate.
Before a crypto trading bot can do its work, the bot must first have cryptocurrencies to start trading. This can be done by linking the trading bot to a crypto exchange, which can be done with an API key. Many crypto exchanges, including Bitvavo (read here), offer this possibility. With some trading bots, it is possible to directly deposit money to the bot.
A trading bot is developed with various strategies. Users often can choose between a strategy that runs more or less risk.
In general, a higher risk can generate higher returns, but also creates a higher risk that money is lost. By choosing lower risk, the potential profits will also be lower, as is the risk of losing money. Of course, and despite the settings, there is always a risk that the money is lost.
Machine learning and artificial intelligence
Machine learning is the name given to the phenomenon that software is able to learn, after which it will become better at performing its duties. Software achieves this by storing all data in a database, and then analyzing it. When a mistake is made, the software is adjusted to prevent making that same mistake again.
This manner of operating makes a computer program smarter, called artificial intelligence.
Machine learning ensures that a trading bot improves. As a result, a trading bot may initially perform worse than it will after several weeks, months or years. Many issuers of trading bots therefore indicate that it is best to use a trading bot for the long term, instead of just for the short term.
Why use a trading bot?
People may have various reasons to use a trading bot, with the below being the most common reasons.
- No knowledge in order to trade in cryptocurrencies or other financial products;
- No time to research cryptocurrencies and to trade in them;
- They don’t want to continually monitor the portfolio, but would like to benefit from the potential returns in the market;
- Diversification of the portfolio to lower the risk of general loss;
- More confidence in the technical and analytical skills of the trading bot than their own thinking and acts.
The pros and cons of a trading bot
The use of a trading bot has certain advantages, but also a number of drawbacks. It is important to weigh both sides before using a trading bot.
Benefits
- A crypto trading bot may be suitable for someone with limited understanding of crypto, but who nevertheless wants to benefit from the possible profit that can be obtained with crypto trading;
- Trading bots do not trade on the basis of emotion or feeling, but purely on the basis of analytical data obtained from the exchange rates;
- A trading bot could be a solution for people that lack the time to research the various cryptocurrencies they’re wanting to invest in;
- A trader can better diversify his portfolio with a trading bot for the purpose of risk management.
Disadvantages
- Many fraudsters have also developed their own trading bots to steal money from unsuspecting users. It is therefore important to carefully investigate a trading bot before using one;
- The majority of people wanting to use a trading bot have little to no understanding of crypto trading, making it difficult for the to find a suitable and reliable trading robot;
- A trading bot can also achieve negative returns, translating into a loss for users; No matter how much a trading bot is praised, there is never a guarantee that a positive result will in fact be achieved.
Keep this in mind while choosing a trading bot
We mentioned in the above drawbacks that there are many fraudsters active. They have developed trading bots that may initially seem reliable. People then unsuspectedly fall for this and deposit money to the trading bot. The dashboard then shows that some profit is obtained after a while, but makes it impossible to have that profit paid out.
Or, it may be possible to withdraw the profit the first time, upon which users have gained confidence in the bot. They will then deposit more money to the trading bot, only to see the invested money disappear like snow before the sun due to a falling exchange rate. They then have no case at all, because the conditions will stipulate that the risk of loss of money always lies with the trading bot’s user.
The above mentioned situations are unfortunately common. Many people have in the past lost money due to fake trading bots that were set up with the sole intention to defraud people.
First, it is important to remember that there is always a risk that money is lost, just like that risk exists when someone decides to trade in crypto themselves. Problems can be prevented by not investing money that you cannot actually do without.
Second, it is important to always carefully investigate a trading bot before taking it into use. On the internet it can often be found whether a trading bot is reliable, or whether it is used to defraud people.
This can be found by entering the trading bot’s name into a search engine like Google, and then reading others’ reviews and experiences. If nothing can be found about a trading robot, it is usually not a good sign. Even when a lot of people complain about the trading bot, it may be wiser to stay away from this trading bot.
Summary
A crypto trading bot is a software program that automatically and on the basis of its own arithmetic power is able to trade in cryptocurrencies. It uses machine learning and artificial intelligence to do this. A trading bot keeps all data that it generates, and learns from it in order to prevent mistakes it made before.
The purpose of a trading bot is to generate profit for its owner. How much the profit is depends on various factors. Users for example can decide how much risk they are willing to run. Although a crypto trading bot can make profits in a market with falling exchange rates, the ultimate return of course also depends on market conditions.
There are therefore various reasons why using a trading bot can be useful. However, remember that there is a real risk of loss of money. The risk can be reduced by carefully researching the trading bot before transferring money to it.