What Is a Crypto Trading Bot and How Can You Use One?

While the life of a cryptocurrency trader is often displayed on social media as glamorous and worry-free, that could not be further from the truth. Many traders spend every waking moment glued to their computer monitors for fear of missed opportunities. The good news is, there's a solution to this problem. It's called a crypto trading bot.

What exactly is a crypto trading bot?

A crypto trading bot is a piece of software that will make trades for you on your behalf. Software solutions like this have the power to execute your trading strategy on auto-pilot, making you money without you needing to trade yourself.

Wait, is this some kind of scam?

No, cryptocurrency trading bots are not a scam. Well, most of them aren't. In the world of cryptocurrency, there's always someone out there trying to get your coins. However, as long as you make sure you're working with a reputable software provider and taking proper account safety measures, they are perfectly safe.

In fact, trading bots aren't even exclusive to cryptocurrency. It's estimated that 75% of the trades made on the United States stock exchange are performed by automated trading systems.

The history of automated trading

In its purest form, an automated trading strategy is simply the concept of following trends in the market and then using those trends to secure a profit. By this definition, the first instance of automated trading was actually conceptualized in 1949 by Richard Donchian.

He's credited with being one of the first people to use rule-based trading strategies to buy and sell funds. While obviously, he didn't use computer software to do this, his influence was essential for the development of software-based automated trading strategies decades later.

If this all seems a little confusing, you may want to start by learning a little bit about market cycles. While financial markets seem like they are confusingly brutal cage fights without rhyme or reason, the truth is that everything operates in surprisingly predictable cycles.

How crypto bots help you to make predictable profits in unpredictable markets

You've likely heard the terms bull market and bear market before, and you've probably even experienced both of them in your lifetime. In the bull market, everyone is happy as assets appreciate in value, and they see their portfolios begin to swell. In bear markets, however, there is only frustration and despair, particularly from those who didn't pull profits during the bull market and are now having serious regrets. 

That's because many people don't understand market cycles at all, and for some reason, they expect the value of these assets to increase perpetually. Even those who do understand usually just accumulate assets and wait out the downtrend because they're convinced that money can only be made in bull markets.

However, the truth is, it's possible to make money in any market because no matter what cycle you're in, the market is never completely flat. While bear markets don't have the exciting highs that the bull markets do, they still have volatility, and that's all you really need to make a profit.

In many cases, these price fluctuations may not last for very long, and the price swing will be for an amount that seems insignificant. However, if you can execute many smaller trades, you could end up making a tidy profit for yourself over time. For human traders, it can be tough to make enough of these trades to be profitable. After all, you don't really know when these peaks will occur, and you still have to do things like eat and sleep, which could cause you to miss prime trading opportunities. 

By using automated trading software, you can act upon more of these opportunities because your trading bot doesn't need to rest. It's your dutiful little servant, trading for you 24/7 so you can make yourself some coffee, go for a run, do some errands, or take a nap without having a panic attack. 

In fact, your crypto trading bot might even be better at making trades than you are. That's because humans are strange creatures that are ruled by their emotions. Unfortunately, emotions and money often don't play well together, and they can cause you to make some costly investing mistakes, even when you know better. 

Software doesn't have emotions, and it doesn't get attached to a project or idea. All your cryptocurrency trading bot knows is that it needs to execute a trade when a specific trigger happens, and it will do so without question or hesitation. 

Is this going to get my exchange account banned?

Don't worry. Your exchange accounts won't be banned for using trading bots. In fact, most exchanges actually provide you with specialized tools to make it easier for you to use software like this.

They do this through the use of an API key, which is sort of like a secret password that allows different services to communicate with each other. When you give your API key to a trading bot, you're telling the exchange that this software has permission to use your account. 

When the software tries to call on the exchange, it will be asked to provide the password, which is the API key. If the key is not provided, it gets a virtual door slammed in its face. You can typically find your API keys somewhere in your settings pages under a heading called "API management" or something similar.

Is it safe for me to give this information out?

Yes, and no. You see, there are different API keys in your account, and you should be careful which one you are providing to your trading bot. Your key is complex, and it can allow for different levels of access depending on the application that is using it. 

Think of it this way. You likely wouldn't think twice about giving somebody your phone number. People can use this number to call you, but they can't access anything on your phone with it. You've essentially given them the secret access key to message you.

What if a stranger came up to you and asked for your phone's unlock code, though? Would you give them that? Of course not! That code unlocks all of your private messages, photos, and possibly even your financial information. You'd protect that passcode with your life, and you should do the same with your full-access API keys.

You should only provide API keys to trading bots that do not require withdrawal access. Any software provider that asks you for a full-access API key is not to be trusted. This is giving them all the access they need to steal all of your coins. Refer to the below safety checklist to keep your accounts protected.

Trading bot safety 101 checklist

•   Never grant full API access to bots

No reputable software provider will ask for full API access. Only use API keys that do not allow the software to withdraw money from your exchange accounts. 

•   Don't use the same email and password for bot accounts and exchanges

If you need to create an online account to use your trading bot, don't use the same email address and password that you use for your exchange accounts. This makes it way too easy for shifty software providers to steal your sensitive login information.

•   Always use 2FA on your exchange account and email address

Your login information can be compromised in a scary number of ways. Use something like Authy or Google Authenticator to put an extra barrier in the way of would-be thieves. Avoid SMS authentication, though, as it's not very secure. 

•   Never keep all of your funds on an exchange

You should never keep more funds on an exchange than you need for trading that day. Transfer profits to a safer external wallet instead to protect yourself from a total loss if your account is compromised.

•   Don't allow for withdrawals outside of your whitelisted addresses

Many exchanges allow you to whitelist addresses that you own. It's a good idea to do this because even if your account is accessed, the thief will not be able to withdraw to their own wallet for a set amount of time, giving you time to get your account back.