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Oct 24 • 12 mins

What is automated crypto trading and how does it operate?

People differ in opinion regarding automated crypto trading, some of them consider it a tool that helps to thrive in trading whilst others believe it is a scam.

Time spares no one and the financial industry is not an exception, particularly a vibrant cryptocurrency trading where keeping up with the price changes is a way to success. Various startegies, a myriad of cryptocurrencies and countless tools can cause confusion amongst inexperienced traders. 

Fortunately, progress is non-stop and new technologies make some processes automated including market analysis, trend prediction and order execution, that frees up more time for thinking and establishing the strategy for long-term trading growth.

What is automated cryptocurrency trading?

Automated crypto trading is an employment of computer programs like crypto trading bots for buying and selling crypto on one’s behalf. The software application’s aim is to respond to market changes and trade at the most appropriate moment. On top of that, automated trading eliminates any uncertainties and emotions associated with manual buying and selling cryptos.

Some sophisticated crypto bots are already operating directly on the blockchain using smart contracts, but the majority of the platforms are still APIs. API stands for an application programming interface that connects your account and the exchange so that it can open positions on your behalf in accordance with the pre-set conditions.

There are numerous pros of utilizing automated crypto trading over manual trading, for example, bots can work non-stop, they are unbiased by emotion, so it will follow the market trend or event right after it happens.

Various bots are available today different from each other in price, features and functionalities from which the most widespread are arbitrage or grid trading bots. Arbitrage ones use advantages of a difference in price of the same asset on different exchanges whilst grid bots employ the strategy of ‘buy low, sell high’.

Thanks to diverse characteristics of bots one may choose the most appropriate strategy of trading, for instance, the hodl function on 3Commas. This is not a simple trade, this is a long-term cryptocurrency investment strategy that enables users to buy crypto at low prices, hold it for a certain period of time and sell it at a profit. It’s up to the users to choose the cryptocurrency they want to trade and a bot assisting them.

Usually crypto trading bots go through four stages:

  • Data analysis. In the high-tech world, data is a key to success, for this reason crypto bots need data analysis. Machine learning can finish data mining tasks much faster than humans;
  • Signal generation. Once the data is collected, the bot carries out trader’s work like prediction market trends and identification of possible trades according to the market data and technical analysis signals;
  • Risk allocation. The risk allocation option helps to define the distribution of risk among investments based on the conditions set in advance by the trader. This set of rules is intended to define how and what percentage of capital will be invested during trading;
  • Execution. Once the signals of the trading system are generated, the process of buying and selling dubbed execution takes place. During this period, signals send buy and sell orders on the exchange by means of API.
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Do crypto bots really help to make a profit?

Probably, it’s not obvious that automated trading prevails over a manual one. In reality algorithmic trading bots have taken over the financial industry to such a degree that most of the activity on Wall Street is generated by the algorithms. This activity is not limited by crypto only, but also, bonds, equities and foreign exchange are bought and sold automatically by the algorithms.

The primary reason for this move is simple: bots can make decisions more quickly than people. Moreover, they couldn’t be under the influence of emotions, so they can implicitly follow the strategy even in a highly volatile environment.

Bear in mind that crypto bots are not a silver bullet that will make a fortune for you, they can’t eradicate all risks. However, they can provide newbies as well as seasoned crypto enthusiasts with an automated process of trading. To gain the maximum benefit from bots, you should properly configure it that requires the basic understanding of the market and regulations associated with trading.

How much does a crypto trading bot cost? The price depends on the set of features one is looking for. Some of them could be free while others may cost you a few hundreds dollars per month.

Is crypto automated trading legal?

We are still far from achieving a global consensus in regards to cryptocurrency legalization. However, it’s not illegal to use an automated trading bot in the countries where cryptocurrency is allowed. Furthermore, the bots are commonly applied in the traditional financial sector. A bot is just a tool for making trades requiring no manual activities to be done, so it doesn’t break any laws. 

The crypto world has been experiencing an increasing number of cyberattacks and continues to attract more scammers. So, you must be careful while choosing a bot, because the frauds caused by it are not rare. There are outright frauds and the ones using more shady tactics that are acting outside the bounds of law. Pump-and-dumps or sending users to untrustworthy brokers who get your money and do not provide the goods or services also take place. 

Does an automated trading system work? It’s not the question whether it works or not, it’s the question of how well it function.Its proper work depends on a number of aspects such as platform and bot being utilized as well as the trader’s level of expertise. 

Pros and cons of automated crypto trading.

The pros of automated trading, that those who avail themselves of using it, are listed below:

  • A minimum of emotions. Automated crypto trading helps to cope with emotions by automation of trades execution when the specified conditions are met. This feature is good not only for timorous users but also for hot-tempered ones who tend to buy and sell assets whenever possible.
  • Backtesting. The system could be backtested based on past data to produce simulation results enabling revision of the strategy before applying it to real trading. By designing an automated trading system all rules must be precise with no room for doubt. Keep in mind that computers cannot take a guess, that’s why it must be guided with great precision. Prior to risking any money, traders have an opportunity to test the pre-set features predicting an approximate gain or loss for every unit of risk.
  • Maintaining discipline. Traders are inclined to make spontaneous decisions during a market rally. However, if they follow the regulations set by the strategy, they are likely to evade huge losses and won’t enter into trades without a clear and well thought-out plan. 
  • Improved order entry speed. Crypto trading bots can permanently keep an eye on the market, respond to its changes and make trades faster than people. In a highly volatile market as Bitcoin, even several seconds may have a significant impact on the trading process.
  • Diversified trading. Bots enable users to implement numerous strategies and invest in various assets to reduce the risk of loss by bringing variety to the portfolio. The things that are extremely difficult and time-consuming for a person could be accomplished by a bot in a fraction of a second.


In spite of multiple benefits users enjoy while trading with an automated bot, there are a number of flaws as well:

  • High start-up expenses. Building an automated bot from scratch takes a lot of time and financial investment. At first these initial costs might neutralize any profits the system provides. On top of that, regular expenses for hosting provider and private server are essential for smooth functioning of the system;
  • Ongoing operational costs. The trading system must be regularly monitored in order to identify possible network outages, software updates or some unexpected market events that could undermine the trading process. The expenditures are accumulated with the time and could eventually reduce the profit;
  • Not enough flexibility. Automated bots aren’t able to make assumptions, they just follow the rules that have been set. So, this inflexibility may lead to lost opportunities of the market and bad trades;
  • Mechanical error. An automated trading bot like any other system might be exposed to mechanical failures such as data errors or network outages, that in turn, could result in an order being placed with wrong price or quantity which is likely to lead to loss of profit.
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Is automated crypto trading safe?

The safety of automated crypto trading  depends on the system regulations and how well the trades are monitored. Do not expect the system to cope with the market swings and generate profit without your regular participation. It’s not a good idea to just set the rules and forget about the system. However, this is a perfect tool to assist in the crypto market providing a 24/7 hassle-free mode of trading and avoiding wrong decisions due to lack of emotions.

Prior to placing money to your trading account, conduct a due diligence of the project or platform in order to make sure that it won’t cause any fraud, otherwise you are risking to end up losing money.

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    About the author

    Dmitry K.

    CEO and Cofounder of ND Labs
    I’m a top professional with many-year experience in software development and IT. Founder and CEO of ND Labs specializing in FinTech industry, blockchain and smart contracts development for Defi and NFT.

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