Crypto never sleeps or takes rest, but what about we humans? We need rest and a good amount of sleep. But the crypto price can swing even at 2 AM, and can shift within minutes. And the opportunities? They will vanish for sure! And to tackle this, crypto trading bots have been invented.
Just like how we read about robots often, about how it is easing out humans’ activities. And the crypto trading environment is never an exception. These trading bots offer the required speed and discipline to earn the profit that we miss in manual trading. They neither get tired nor emotional! These bots are now easily accessible to retail traders through platforms like,
The algo-trading market is said to reach $31.49 billion by 2028, which depicts the usage of automation in crypto trading.
In this blog, we will learn the following,
Let us begin!
So, basically, crypto trading bots are software that automates the buying and selling of cryptocurrencies. So, instead of constantly watching the trading charts day and night, the bots help traders to conduct the activities on their behalf, and help them reap profit out of it. These bots are connected to any selected exchange via API keys, and they follow the set of rules and strategies offered by the trader and execute processes whenever those conditions are met!
Just think of it as your trading assistant, who never sleeps and doesn’t miss even a single price movement.
What are the benefits of using these bots?
With these many benefits, aren’t there any downsides to leveraging a trading bot? The answer to this is a big no! It does come with a few risks.
Risks of Trading Bots
There are a lot of crypto trading bots in the market! Each of them has its own strategy and is used in diverse environments. Let us view them one by one.
Dollar cost averaging bots are for long-term investment. Instead of investing a high amount in crypto, this bot follows a strategy where a fixed amount of money is invested in crypto assets at regular intervals, regardless of the current market price.
How does it work?
Imagine investing $1,000 in Bitcoin. Instead of buying it all at once, a DCA bot might buy it at $100, say, every Monday. When the price dips, you get more BTC but for the same money. Over a period of time, this would average out your entry price.
So, where are they used?
How to set up one?
Step 1: Start by connecting the exchange to the selected bot platform
Step 2: Choose the digital asset that you are willing to invest in.
Step 3: Determine the frequency of investment (ex, every Monday at 12 PM)
Step 4: Set the amount of money that is ready to invest (ex. $100 per buy)
Step 5: The bot executes the buy on your behalf.
A grid bot functions in a sideways market. It buys low and sells high, but not with a huge price difference, just a minor difference. But the process is repeated several times, thus ending up in profits. The bot eventually sets up a grid for the buy and sell orders, and within a defined price range.
How does it work?
Let us imagine that Ethereum is trading somewhere between $1,600 and $1,800. So, you can configure the grid bot in that price range. The bot places various buy orders below the current price (like, $1,620, $1,650, $1,670). And it places sell orders above the current price (like, $1675, $1,725, $1750). So, every time the price moves up and down, the bot buys at a low price and sells at a high price automatically. Thus, making a profit.
Where are they used?
How to set up one?
Step 1: Pick your desired trading pair (ex, BTC/USDT).
Step 2: Define the price range like ($1,500–1,700)
Step 3: Choose the number of grids. Here, a larger number of grids is equal to smaller and more frequent trades.
Step 4: Allocate the capital you want to invest in this strategy
Step 5: The bot automatically buys and sells orders in small price intervals
An arbitrage bot is an expert in exploiting the price difference across various exchanges. The concept is so simple here, buying low in exchange A and selling it high in exchange B, and making a profit out of it, that’s it! As the crypto market is highly volatile, there would definitely be a significant difference in price on each exchange. The price of crypto on Binance would be quite high when compared to Coinbase. The arbitrage bot studies these differences more effectively than a human can and makes a profit out of it.
How does it work?
There are three different arbitrage bot strategies,
Where are they used?
How to set up one?
Step 1: Select exchanges like Binance, Kraken, or Coinbase.
Step 2: Connect the bot with API keys
Step 3: Configure the bot with the chosen trading pair, like BTC/USDT
Step 4: The bot monitors the price gaps in real time.
Step 5: Whenever the spread fees are higher, the bot automatically executes buy and sell orders.
A sniper bot is crafted to instantly buy or sell a crypto asset (mostly buy) during its launch. It is moreover like rushing before the crowd and buying the limited editions. It is usually during,
It snipes the opportunity much faster than a human can, and that’s why it is termed as “Sniper bot”.
How does it work?
Where is it used?
How to set up one?
Step 1: Connect the bot to a DeFi wallet like Metamask
Step 2: Then, enter the target token’s address
Step 3: Configure the bot with various conditions, like,
Step 4: Then, the bot monitors the mempool and executes the transaction automatically.
An MEV bot constantly searches for profit-making opportunities by examining the mempool closely. This helps them identify the pending transactions that can offer maximum profit. The bot reorders, skips, or even eliminates the transactions in a blockchain before they are confirmed. MEV stands for maximal extractable value, so all it wants to make is extra profit from pending transactions.
How does it work?
Where is it used?
How to set up one?
Step 1: In order to see mempool transactions, run on an Ethereum node.
Step 2: Make use of MEV toolkits like Flashbots to connect with miners
Step 3: Program the bot in such a way that it can detect profitable opportunities (like huge trades)
Step 4: Upon completion of configuration, deploy and let the bot automate the strategies.
A flash loan bot helps users with limited funds to acquire loans without collateral, and conduct the trade and repay the loan along with interest in a single payment. This is widely used in DeFi platforms like Aave. If the trade isn’t profitable, then the transaction would automatically reverse.
How does it work?
Where is it used?
Arbitrage trading across various DEXs. And it is ideal for individuals who have limited funds, and helps them profit from undercollateralized loans.
How to set up one?
Step 1: Select a platform that offers flash loans. Aave is a commonly used one.
Step 2: Code a smart contract that borrows funds and executes the trade
Step 3: Deploy it on Ethereum or other blockchains.
Step 4: The bot monitors arbitrage opportunities and triggers the contract automatically.
Scalping bots are specially built for a trade that is both high-frequency and short-term. So, instead of holding assets for hours or days altogether, scalping bots aim to make tiny profits from frequent trades, or can even execute 100s of trades per day.
How does it work?
Where is it used?
How to set up one?
Step 1: Select an exchange with high liquidity and low fees
Step 2: Configure the bot with a scalping strategy, such as small spreads or others’
Step 3: Allocate trading capital with repeated trades.
Step 4: Run the bot 24/7 to capture the small price movements.
A mean reversion bot is built on the ideology that crypto prices come back to their average level after moving too high. It assumes that extreme price spikes or price dips are temporary and the price will revert to the mean.
How does it work?
The bot monitors moving averages for the past few days, like 20 or 30 days.
If the price falls below the average, then the bot buys. And if the price rises above average, then the bot sells it.
Where is it used?
It is used in sideways markets, where the price would keep fluctuating. And it is useful for traders who would like to proceed with trading after a good amount of technical analysis through RSI or Bollinger bands.
How to set up one?
Step 1: Pick a trading pair of your choice, like ETH/USDT
Step 2: Configure the bot through various indicators
Step 3: The bot monitors the market and executes trades based on buy/sell signals
Step 4: You can also make use of risk management tools like stop losses or take profits.
A telegram trading bot is a bot that is integrated with the Telegram app, which is used for messaging. So, instead of running a bot on separate platforms, you can easily trade through simple commands in the Telegram chat. These bots offer the required convenience to traders.
How does it work?
You can connect your wallet, like Metamask or any exchange of your choice, through the API. The bots then respond to commands in Telegram. Some bots also run automated strategizing, such as,
Where is it used?
It is popular among DeFi traders who prioritize speed. It is ideal for token launches and monitoring wallets. It is also used by casual traders who can’t log in to exchanges due to their busy schedules and manage trades right from Telegram.
How to set up one?
Step 1: Search for a verified Telegram bot.
Step 2: Connect your wallet or the API key of your chosen crypto exchange
Step 3: Configure the bot with strategies like,
Step 4: Now trade directly from Telegram chat commands.
AI and ML bots use advanced algorithms to learn the market data, which helps them make smarter decisions. So, unlike other bots that use fixed strategies, these AI/ML bots learn meticulously and adapt over time, and help in spotting opportunities that humans miss!
How does it work?
The bot is trained with historical data to analyze the market better. It continues to change and refine its strategies as new market data comes in. It executes trades automatically when the trading patterns tend to offer profitable scenarios.
Where is it used?
It is ideal for traders who want data-driven trading. It assists various strategies like scalping, arbitrage, and other bots.
How to set up one?
Step 1: You can first start by choosing an AI-powered bot service, and then connect it with your exchange or wallet.
Step 2: Then, allocate funds to it, and the bot will continuously learn and trade without manual intervention.
A market-making bot offers the required liquidity to exchanges by continuously placing buy and sell orders for a trading pair. It profits from the price difference between the buy and sell orders.
How does it work?
The bot sets multiple limit orders on both sides of the order book, so when a trader buys from the bot’s sell order, the bot would buy it at a lower price and re-list it. And profit comes from repeated spreads while keeping the market liquid!
Where is it used?
In centralized exchanges with high trading volume. And it is widely preferred by institutional traders who want consistent wins with lower risks. And exchange itself leverages the market-making bots to ensure enough liquidity.
How to set up one?
Step 1: Select a market-making bot ( you can get one from Hummingbot)
Step 2: Connect the exchange through API keys
Step 3: Select the trading pair and do the configuration for,
Step 4: The bot then continuously places buy and sell orders and earns from the spread.
Not all bots are the same! Each type is created to meet certain market conditions. So, for traders who want to have long-term investing, they can go for either DCA or Grid bots. Say, for example, a DCA bot would buy weekly rather than buy a huge amount at a time.
Similarly, Scalping, sniper, and mean reversion bots capitalize on quick price movements and are best suited for traders who monitor volatility constantly. Meanwhile, MEV, flash loan, and sandwich bots operate in high-risk environments and require technical expertise and faster execution.
Even the best bots cannot offer a guarantee to generate profit. So, traders must learn some safety measures before proceeding with crypto bots.
API Key Permissions
It is advised for traders to only offer trading rights to the bots and avoid offering withdrawal access unless it is necessary. Say, for example, a stolen API key that has withdrawal rights can lead to fund theft.
Exchange & Network Risks
Downtime, hacks, or even congestion in the blockchain would lead to delayed trades and could even cause losses. For instance, if an exchange is undergoing maintenance work, then the bot’s activity will be stopped temporarily, which can result in missed opportunities.
Bot Scams
Choosing a reputable platform with good reviews is a smart move. It is better to identify red flags in the market that claim to state “ guaranteed profit”. As they are nothing but scams!
Regulatory & Tax Compliance
Crypto regulations vary with each country, so check the local laws before using the bots, and they do not report taxes automatically.
Pro tip: Better treat bots as a mere strategy, not as a profit-making machine. As they are beneficial in helping you generate profit in the volatile crypto market, it does require constant monitoring of their performance.
Choosing the right bot depends on your trading goal. So, you must first determine your objective and then select “the one” for your trading purposes. Here is a checklist for you to stick with while selecting your smart assistant.
№1: Match the bot to your goal
In case you want a long-term investment, then DCA and grid are a good choice. Similarly, if you want quick profits, then scalping or sniper bots would be better. And if you are looking for advanced bots in the DeFi space, then MEV and flash loans are nice picks. Still, there are a lot more bots in the market, even in this blog, we have covered an extensive range of bots, so research yourself, understand each bot’s functionality, and then choose the perfect fit for you!
№2: Decide platform type
There are several ways to obtain your desired bots. Below is a breakdown of those bots along with their characteristics.
Hosted platforms like 3Commas and Pionex
These are easy to set up, and users can leverage them based on a paid subscription. But it offers less control to traders.
Open source like Hummingbot
These are free and flexible, and require technical knowledge to connect and use the bot
Self-coded bots
These are pretty common among developers, who can code their own bots. As this requires deep coding and knowledge in blockchain
№3: Consider cost vs control
Paid bots tend to save time, but are less flexible, and traders can make only a few strategy tweaks. Meanwhile, DIY bots offer complete control to the developers, but it does require some time. And in case you are from a non-technical background, then you may need skilled developers to develop one, along with constant monitoring.
Start small & scale up.
It is suggested to begin with small trades to test its performance. And one can gradually increase the capital once the bot’s strategy starts to reap profits. Say, for example, if you want to leverage the DCA bot, then start with $100 DCA bot on BTC, and then slowly you can increase your investment amount to $1,000 once you find it to be rewarding.
Crypto trading bots have offered a significant transformation in the way people trade. These bots offer the required speed and automation that humans can’t match. There is a bot for every type of trader in the market, no matter whether you are,
You have a lot of varieties in the market that can align with your expectations. Understanding how each bot works, along with the risks it poses, is important for long-term success.
In a volatile crypto market that never sleeps or takes a pause, trading bots are more than something that offers convenience! They are increasingly becoming a must-have for traders out there! If you want to develop any of the crypto trading bots, then partnering with Fourchain, a leading crypto trading bot development company, is a smart move! From requirement gathering to launch, we offer the necessary support you need in this journey.
Complete Guide to All Types of Crypto Trading Bots was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.
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