Use Cases for Crypto Trading Bots

August 2, 2021
7m
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What are the main reasons that traders opt for crypto trading bots? Is it plain old automation, or is there something more behind it?

Data shows that the algorithmic trading market reached a valuation of $11.1 billion. By 2025, the figure should hit $18.8 billion per the estimations of experts. With a potential increase of 69%, we can safely conclude that there is indeed an incentive for using automated trading software.

The core purpose of trading bots is to automate actions that are either too complex, time-consuming, or difficult for humans to execute manually. The sophistication of these tasks ranges from automating a single trading strategy on a single trading pair to intelligently routing trades between any asset for a diverse portfolio.

Without continuous effort, some bots can let users implement a complete portfolio management strategy, saving immense amounts of time.  Instead of requiring you to be online constantly to manually place trades and adjust your portfolio, bots can take control to execute your strategy day or night.

Quality trading bots can save you money by offering improvements over a manually implemented strategy. Bots are faster at collecting data, more precise when placing orders, and can crunch numbers faster than any human.

When to Use Trading Bots

The possibilities are endless when it comes to bots. There are bots for rebalancing, portfolio management, data collection, smart order routing, or anything in between. Whatever it is you want to do, there is likely a bot out there somewhere which does it.

Before we start looking for a bot, think about the most cumbersome aspects of cryptocurrency trading for you. Consider each of the tasks you do throughout the day. Come up with a small list of the largest tasks which you wish could be automated, so you can spend less time with your cryptocurrency portfolio.

In order to help you think through tasks that can be automated with trading bots, the next sections will describe different ways that trading bots assist us with our financial journey. Consider each of these aspects to find the perfect tasks for automation.

Repetitive Tasks

Repetitive tasks drain everyone’s energy. Doing the same thing over and over again just means consuming more of your time with a task than necessary. If there was only a real-life way to copy and paste work, we would have more time for leisure. We would easily finish all of our tasks not by mindlessly work on redundant tasks, but by automating the process.

That is basically what a crypto trading bot is for. By doing the work one time by setting it up with the trading bot, you can then copy that work over and over again until the end of time. Is that concept not exciting?

Imagine you read this article which found that 1 hour rebalances historically outperformed alternative rebalancing frequencies. Now, you want to rebalance your portfolio every hour. That would mean every 1 hour, you would need to calculate the percentages of each of the assets in your portfolio, determine the optimal trades, actually perform the trades, and stay online the entire time. Let’s be honest, it’s an impossible task. Even if it was possible, any reasonable person would go crazy with the repetition.

Bots do not have a problem with mundane repetition. In fact, that is one of the first reasons software engineers will automate a task, in this case rebalancing. Create the bot once and automate your portfolio forever. No more repetitive tasks!

Precision

Trading is a game of precision. New traders may not mind the imprecision of moving into and out of positions on a whim, but as we gain experience, many traders begin to grasp the necessity for being precise. Every trade can have an impact, so carefully select trades. Bots don’t have the concept of being careful, but they are precise.

Let us consider an example scenario. Say we want to sell DOGE when the price of Bitcoin reaches exactly $100,000. Doing this manually would require incredible skill and patience. Manually implementing this strategy would probably end up with us accidentally missing the mark and selling DOGE when Bitcoin hit $100,010. That’s not bad, but it was not the strategy we wanted to implement. Our imprecision meant we didn’t end up following the plan.

Executing a precise strategy is simple for bots. The bot can easily monitor the market for this condition and execute the trade when the time is exactly right. Bots are precise, quick, and reliable for this sort of execution strategy.

Time Consuming

Everyone has things to do - life is chaotic. We do not have time to be at the computer every waking moment ensuring our portfolio is on track.

In one of the previous examples, we discussed portfolio rebalancing every hour. This is an example of something that could easily take 15 minutes or longer for each rebalance. If you have a diversified portfolio, it will take even longer. Not only would this be repetitive, but it would also be time-consuming. Countless trading strategies are cumbersome in this way.

Trading bots are not like you. They do not have anything better to do. All they want to do is implement these time-consuming strategies for you. Since they run on computers, calculations happen in an instant, trades process in the blink of an eye, and they never get tired. Time-consuming tasks then get simplified to set it and forget it. Automating a time-consuming task can be done by configuring a few things in a trading bot and letting the trading bot implement the strategy for you.

24/7 Markets

The cryptocurrency market never sleeps. Not for a second. Exchanges do not close down at night. Even when one exchange goes down for maintenance or updates, there are still hundreds online still humming along. This 24/7 market makes it impossible for you to always be able to monitor your portfolio. Eventually, you will need to sleep, and we all know assets have an affinity for dumping as soon as we look away. At least it feels that way.

Once you realize that you cannot always be ready to take action, there are two options: deal with the consequences of not being around to handle every situation for your portfolio or automate your strategy with a trading bot. Most will take the option that allows them to sleep easy at night.

Of course, that does not mean that our strategy needs to be the same around the clock. It might be that you have a portfolio strategy during the day and a different strategy at night which will act as a safety for your portfolio while you’re sleeping. Whatever your strategy, bots can help you automate that strategy so you can spend less time worrying about the “what ifs” while your laying in bed at night.

Trading is Complex

At the end of the day, even if the repetition, time commitment, and precision were not enough to drive us towards trading bots, there is still the factor of complexity. Some strategies would be physically impossible to implement for a human due to the sheer complexity.

Taking smart order routing as an example. The requirements for effectively routing trades through numerous trading pairs intelligently are countless. Starting from the top we have the need for monitoring every trading pair across the exchange in order to determine the optimal time, asset quantity, and price for a trade. Next, we need to factor in the time restrictions to complete the routing before the market conditions change. Then we need to actually execute the trades to fill this first stage of our order. Finally, rounding it off by starting from the top again because we were only able to move $100 in the last order and need to move $100,000 in total.

Cryptocurrency trading is an intricate skill set that is developed through continuous self-improvement, overcoming mistakes, and forging forward in the face of uncertainty. Even with experience under our belt, some strategies are still out of reach to even the most advanced traders if attempted manually.

Complex strategies need to be automated using trading bots. Without these bots, the strategy wouldn’t be possible. The lesson is to use trading bots to implement trading strategies that are too complex to execute manually.