Crypto Trading Bots
Since the beginning of the cryptocurrency boom that started in early 2017, people all around the world have been clamoring to trade in bitcoin and other altcoins. The problem with any commodity in the global marketplace is traders cannot be at their station 24 hours a day, 7 days a week. There are lots of reasons as to why companies and individual traders might want to build a crypto trading bot. It might be to allow them to buy and sell cryptocurrencies such as bitcoin without needing to physically undertake transactions. Another common reason for creating a crypto trading bot is to make it commercially available to others for a fee.
What is cryptocurrency?
Cryptocurrency is a decentralised medium of exchange which uses cryptographic functions to conduct financial transactions. Cryptocurrencies leverage the Blockchain technology to gain decentralisation, transparency, and immutability. In the above, we have discussed how Blockchain technology is implemented for cryptocurrencies.
In general, the security of cryptocurrencies is built on cryptography, neither by people nor on trust. For example, Bitcoin uses a method called “Elliptic Curve Cryptography” to ensure that transactions involving Bitcoin are secure. Elliptic curve cryptography is a type of public key cryptography that relies on mathematics to ensure the security of transactions. When someone attempts to circumvent the previously mentioned encryption scheme by brute force, it takes them one-tenth the age of the universe to find a value match when trying 250 billion possibilities every second. Regarding its use as a currency, cryptocurrency has the same properties as money. It has a controlled supply. Most cryptocurrencies limit the supply of tokens. E.g., for Bitcoin, the supply will decrease over time and will reach its final quantity sometime around 2,140. All cryptocurrencies control the supply of tokens through a timetable encoded in the Blockchain. One of the most prominent features of cryptocurrencies is the exclusion of financial institution intermediaries
The absence of a “middleman” lowers transaction costs for traders. For comparison, if a bank’s database is hacked or damaged, the bank will rely entirely on its backup to recover any information that is lost or compromised. With cryptocurrencies, even if part of the network is compromised, the rest will continue to be able to verify transactions correctly. Cryptocurrencies also have the important feature of not being controlled by any central authority: the decentralized nature of the Blockchain ensures cryptocurrencies are theoretically immune to government control and interference.
As of December 20, 2019, there exist 4,950 cryptocurrencies and 20,325 cryptocurrency markets; the market cap is around 190 billion dollars. The total market cap is calculated by aggregating the dollar market cap of all cryptocurrencies. There are three mainstream cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC). Bitcoin was created in 2009 and garnered massive popularity. On October 31, 2008, an individual or group of individuals operating under the pseudonym Satoshi Nakamoto released the Bitcoin white paper and described it as” A pure peer-to-peer version of electronic cash that can be sent online for payment from one party to another without going through a counterparty, i.e., a financial institution.” Launched by Vitalik Buterin in 2015, Ethereum is a special Blockchain with a special token called Ether (ETH symbol in exchanges).
A particularly important feature of Ethereum is the ability to create new tokens on the Ethereum Blockchain. The Ethereum network went live on July 30, 2015, and pre-mined 72 million Ethereum. Litecoin is a peer-to-peer cryptocurrency created by Charlie Lee. It was created according to the Bitcoin protocol, but it uses a different hashing algorithm.
Blockchain is a digital ledger of economic transactions that can be used to record not just financial transactions, but any object with an intrinsic value. In its simplest form, a Blockchain is a series of immutable data records with timestamps, which are managed by a cluster of machines that do not belong to any single entity. Each of these data blocks is protected by cryptographic principle and bound to each other in a chain. Cryptocurrencies like Bitcoin are made on a peer-to-peer network structure. Each peer has a complete history of all transactions, thus recording the balance of each account. For example, a transaction is a file that says “A pays X Bitcoins to B” that is signed by A using its private key.
This is basic public-key cryptography, but also the building block on which cryptocurrencies are based. After being signed, the transaction is broadcast on the network. When a peer discovers a new transaction, it checks to make sure that the signature is valid (this amounts to use the signer’s public key, denoted as the algorithm. If the verification is valid then the block is added to the chain; all other blocks added after it will “confirm” that transaction. For example, if a transaction is contained in block 502 and the length of the blockchain is 507 blocks, it means that the transaction has 5 confirmations (507-502).
Blockchain to Cryptocurrencies
Confirmation is a critical concept in cryptocurrencies; only miners can confirm transactions. Miners add blocks to the Blockchain; they retrieve transactions in the previous block and combine it with the hash of the preceding block to obtain its hash, and then store the derived hash into the current block. Miners in Blockchain accept transactions, mark them as legitimate and broadcast them across the network. After the miner confirms the transaction, each node must add it to its database. In layperson terms, it has become part of the Blockchain, and miners undertake this work to obtain cryptocurrency tokens, such as Bitcoin. In contrast to Blockchain, cryptocurrencies are related to the use of tokens based on distributed ledger technology. Any transaction involving purchase, sale, investment, etc. involves a Blockchain native token or sub-token. Blockchain is a platform that drives cryptocurrency and is a technology that acts as a distributed ledger for the network. The network creates a means of transaction and enables the transfer of value and information. Cryptocurrencies are the tokens used in these networks to send value and pay for these transactions. They can be thought of as tools on the Blockchain and in some cases can also function as resources or utilities. In other instances, they are used to digitise the value of assets. In summary, Cryptocurrencies are part of an ecosystem based on Blockchain technology
What is A Crypto Trading Bot?
A bot is simply an automated program that operates on the Internet and performs repetitive tasks more efficiently than humans. In fact, some estimates suggest that around half of internet traffic is made up of bots that interact with web pages and users, scan for content, and perform other tasks.
Crypto trading bots operate under the same basic principle. They are software programs that execute functions using artificial intelligence based on pre-established parameters. No more missed trades or missed opportunities – by running a set of algorithms, you can automatically buy, sell, or hold assets in a timely, efficient, and automated manner day or night from anywhere in the world.
Trading in cryptocurrencies is particularly addictive because the market is highly volatile. Bitcoin prices can and have dropped by as much as 25% in a day. While investors who are in for the long term might not worry about taking advantage of such fluctuations, cryptocurrency traders can make enormous amounts of money from such volatility.
The solution to this problem is the trading bot. Companies have used such bots to set buy/sell commodities on global stock exchanges for decades. Trading bots help to automate the process and thereby relieving pressure on companies and traders.
Trading bots are software programs that use APIs to interact with financial exchanges. They actively monitor exchanges around the clock and will react in accordance to whatever predetermined criteria they have been programmed with.
How do crypto bots work?
To give a basic example, if a trading bot has been told to buy a commodity once the price hits $1 or lower, and sell once it hits $2, it will act in accordance with these limits, hopefully making a profit. A cryptocurrency trading bot operates on these exact principles to facilitate the buying and selling of bitcoin and other cryptocurrencies.
Cryptocurrency trading is the act of buying and selling of cryptocurrencies with the intention of making a profit.
The definition of cryptocurrency trading can be broken down into three aspects: object, operation mode and trading strategy. The object of cryptocurrency trading is the asset being traded, which is “cryptocurrency.” The operation mode of cryptocurrency trading depends on the means of transaction in the cryptocurrency market, which can be classified into “trading of cryptocurrency Contract for Differences (CFD)” (The contract between the two parties, often referred to as the “buyer” and “seller”, stipulates that the buyer will pay the seller the difference between themselves when the position closes) and “buying and selling cryptocurrencies via an exchange”. A trading strategy in cryptocurrency trading, formulated by an investor, is an algorithm that defines a set of predefined rules to buy and sell on cryptocurrency markets
How Bots Work
Investors seek out the crypto trading bots that will be most useful for them and then download the code from a developer. Many bots have user fees, some of which can be quite steep. Each bot has different requirements in terms of software and hardware. To maximize the impact of a bot, an investor must know how to best utilize the tool.
For instance, investors must have the proper accounts set up across digital currency exchanges and must stock those accounts with cryptocurrency holdings. In many cases, they must still make investment decisions such as when to buy or sell. What a crypto bot tends not to be is a get-rich-quick solution for an investor not looking to put in the time and effort necessary for success. Most crypto trading bots have the following key components:
Market Data Analysis
This module will save raw market data from various sources, interpret it, and decide whether to buy/sell a specific cryptocurrency asset. Most of the bots allow users to customize which types of data go into the signal generator sector to get refined results.
Market Risk Prediction
This module is a critical aspect of a crypto trading bot. Like the previous one, this one too uses market data to calculate the potential risk in the market. Based on that information, the bot will decide how much to invest or trade.
Buying/Selling the Assets
This module of the crypto trading bot uses APIs to buy or sell the cryptocurrency asset strategically. Sometimes, you might want to avoid buying tokens in bulk, and during certain situations, immediate purchases could be the best choice. The Execution module takes care of such aspects.
Different bot trading strategies
Crypto trading bots rely on algorithmic trading to run and process complex mathematical formulas and automate and accelerate the trading process.
Trend following Strategy
This is the simplest trading strategy in which the bot responds to direct market changes. Trend following does not require complex algorithms that need to factor in such things as predictive analysis etc., and so are quite simple.
The arbitrage model involves cryptocurrency bots exploiting the difference in prices between the numerous cryptocurrency exchanges throughout the world. Since there is no one centralized exchange to determine the price of a cryptocurrency – a role that with fiat money is filled by the central banks – for this reason, prices vary from exchange to exchange.
The market-making strategy allows traders to buy and sell high volumes of currency and profit from the spread. To be able to trade such volumes, market-making traders rely on trading bots.
Advantages of Crypto Trading Bots
Following are some of the core characteristics and advantages of crypto trading bots:
There is a specific limit to the amount of data a human trader can process at a time. Even if all the data is processed, it is tough to seek insights based on that data. Crypto trading bots can easily manage bulks of data and arrive at plausible conclusions.
Trading cryptocurrency assets using a crypto trading bot is always considered more efficient. You do not have to worry about delays and, most importantly, human errors. If the bot receives the correct data and is working on suitable algorithms, it can trade assets with a better chance of profit. An added advantage is that these bots can work 24*7.
A crypto trading bot takes every single decision based on the perceived. Unlike humans, it does not have a fear of loss or greed of profit. Experienced traders may make rational decisions by overpowering their emotions, but that may not always be the case with everybody, especially beginners. On the other hand, a crypto trading bot always keeps emotion out of the equation.
Disadvantages of Crypto Trading Bots
Crypto trading bots are not exactly perfect when dealing with a highly unpredictable market. Situations like the on-going Covid-19 pandemic can have an unexpected impact on the market, and you cannot always predict how these events impact the economy. You need a better, psychologically driven strategy to keep racking up the profit.
Since crypto trading bots do not possess the capability to do so, that is one area where you need to trust your instincts. Programming errors, too, can impact the efficiency of crypto trading bots. You must also be extra careful while determining the bot’s conditions and its actions, especially when programming your crypto trading bot from scratch.
Sneak Peak in Crypto Trading Bots
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About the Author
Darren Olayan is a blockchain advocate deeply experienced in the development, promotion, and services. Through both positive and negative experiences, Olayan has become proficient in the vague constantly shifting regulation side of blockchain and spent years advising companies on licensing procedures. Darren is adamant that the NFT technology will change the world of technology and has the potential to level the playing field worldwide.
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