The cryptocurrency market isn’t like the stock market in that it never sleeps. It is a market that operates 24 hours a day 7 days a week. Even when certain exchanges are closed, other exchanges will be open, and when all exchanges are closed, the spot market is as vibrant as ever.

This can be quite stressful for a trader who’s looking to make money while also trying to sustain a family or even just trying to strike up a balance between work and play. It can also be stressful when they leave a trade open overnight only to meet an unpleasant surprise in the morning when they realize an overnight event practically wiped out their account.

Because of how volatile the market is, cryptocurrency trading bots like Bitcoin Profit and others have become very popular. They allow traders to stay on top of their trading whenever and wherever, even when they are sleeping and when they are away from their screens. Also, a trading bot is much faster at executing trades than a human being and is far more efficient because of its lack of emotion.

Because of how popular trading bots have become, there has been something of an explosion of trading bots being offered on the market. Some of them are free and open source, some of them are licensed on a subscription model and some of them are sold at a one-time purchase price.

The Basics About Cryptocurrency Trading Bots

A trading bot, in general, is a piece of software that interacts with an exchange via something known as an application programming interface (API) to obtain information from the exchange and transmit information to the exchange. It will then place buy and sell orders on the exchange via that API on behalf of the trader. The program is also equipped to be able to interpret the information it is getting from the exchange according to a set of rules that have been programmed into it.

When it places trades on the exchange, it does that based on the interpretation it makes of the data it obtains from the exchange. The trading bot will monitor such things as price action, time, volume and orders in the market and calculate indicators based off of the action, using these to make a decision whether to buy, sell or wait at any given time.

Trading bots aren’t unique to the cryptocurrency markets. They’ve been around for quite a while in other financial markets, even being responsible for some major events, such as the flash crash of 2008.

However, these trading bots have not always been available to the average retail trader. Because of how expensive they were and the massive amount of research that went into developing them, they were the preserve of large hedge funds and high-frequency traders.

The cryptocurrency market is different, however. The blockchain, which is the basis of all cryptocurrencies, is highly transparent, meaning customers will always have 100 percent access to order books on the market at any given time as opposed to the situation on the stock and forex markets.

This type of access makes it possible for anyone to analyze the electronic order book and develop a trading bot that can analyze it and place trades on their behalf.

Many people also happen to like trading passively. They don’t have the time skill to analyze the markets constantly looking for their next great setup. As a result, bitcoin bots help traders to always place the most informed trades on the market without having to do any of the work themselves.

What Types of Trading Strategies Do Bots use?

The cryptocurrency market is less mature than other financial markets. However, algorithmic trading has done much to catch up. Most exchanges have also developed robust APIs that allow trading bots to participate in the markets easily. There are a variety of strategies that bots use to make money on the crypto markets.

Arbitrage

Arbitrage is one of the very first methods used by traders to make money not only on the crypto markets but all markets. As markets grow more efficient, however, it becomes harder to make any money from arbitrage. While other markets are mature and, therefore, do not offer much opportunity for arbitrage, the cryptocurrency market is still young and has enough inefficiencies to allow people to make money from arbitrage.

Arbitrage involves taking advantage of large spreads in prices between exchanges by buying from one exchange and selling in another to make a profit. Because of the digital nature of crypto trading, transactions are low, and so it is relatively easy to make a profit. This method is growing weaker by the year, however, as spreads grow tighter between exchanges.

Market Making

Market making involves continuously buying and selling cryptocurrencies on both exchanges and spot markets, including derivative contracts for currencies to make money off of spreads in the buying and selling prices of cryptocurrencies across markets.

It requires multiple buy and sell limit orders across markets that are changed continuously as the prices change. This job is best done by a fast and efficient robot as opposed to a human. This method does, however, offer low profitability in low liquidity markets due to its large reliance on the ability to get out of a trade quickly and easily.

Author's Bio: 

Md Rasel is a professional blogger.