Everyone wishes that they could retire and not have to work. In the best case, you’d live off renting real-estate or retiring from crypto. But retirement takes a long time and until then, we have to be satisfied with little things – like earning passive income from existing crypto investments.
Passive income is a diverse field in the crypto market. Investors can yield farm, loan assets, stake, and mine cryptocurrencies. But did you know that you can make passive income by trading – a strategy that is everything but passive? Let me introduce you to making passive income with crypto trading bots.
What Is a Crypto Trading Bot?
A crypto trading bot is a software that automates trades by following a preset trading strategy. The bot is connected to your wallet or exchange account and interacts with the market whenever it needs to execute an order. Trading bots can follow simple orders such as buying and selling at different times of day, but they can also keep up with complex trading strategies.
The job of a crypto trading bot is to do what you can’t, which is constantly monitor market data such as price, volume, and order book discrepancies. You’ll program the bot to follow your orders and it will do so 24/7.
A trading bot is a tool used by three types of investors:
- Inexperienced investors
- Experienced investors with no time
- Beginners without time nor experience
Crypto trading bots serve well as a passive income solution since you can automate a task that you would usually perform manually. But since trading is complex, achieving profitability with trading bots is way harder than with yield farming or staking. However, automated trading relies on market data, so as long as your strategy is good, you’ll have no worries. But remember, accidents always happen.
Choosing a Crypto Trading Bot
If you’re interested in making passive income with a crypto trading bot, you’ll have to find a platform that works for you. Crypto trading bots are so popular nowadays that you have many options to choose from. But the tools and features you’ll find vary from platform to platform, so you’ll have to choose a bot wisely by ensuring that it meets a few criteria.
Ease of Use
Is a crypto trading bot worth your time if you can’t use it? You can’t achieve profitability if the platform is too mysterious to use and if this is a passive investment strategy, you’re not supposed to spend hours finding your way around the platform. A good crypto trading bot should be user-friendly, so choose one that focuses on ease of use.
A user-friendly crypto trading bot is one that offers a simplistic interface and requires only a few clicks to manage a bot or portfolio. If you’re a beginner, you won’t need a bot that requires programming a bot. You’ll want to choose from a set of options and strategies. But if the opposite is true, you’ll still want an interface that’s simple enough for you to write scripts.
You’ll also want the user experience to be consistent. You can’t have one feature that everyone can use and another one that requires a 30-minute YouTube tutorial. So before making a final choice, make sure that all parts of the platform are beginner-friendly.
The trading bot you’ll use works by connecting to exchanges and other trading venues. They execute trades through those platforms and keep you updated on their activity. But you can’t use every trading bot with every exchange. Some bots have access to minor exchanges while others connect exclusively to bigger ones.
What you want is a healthy mix. If you have accounts on multiple exchanges, you’ll want the trading bot to work on all of them. You don’t want to use a trading bot for each exchange because you will ruin your chance of profitability by spending even more time and money.
A crypto trading bot connects with an exchange through an API key. This key is easy to create and manage, which means that most bots are integrated with most platforms. If you trade on a popular exchange such as Binance or FTX you can access most trading bots. But if you use a less popular platform like Phemex, you’ll have to check whether the trading bot of your choice supports the exchange before paying for a subscription.
API keys make crypto trading bots safe, because they allow you to trade crypto and move capital without giving the bot full control of your funds. But reputation and trust still matter because a bad trading bot can execute trades poorly or forget to execute them at all.
Before making a final decision, check the reputation of the team behind the trading bot and search for reviews. A team tends to have a bad reputation due to:
- Failing to update the bot regularly
- Not diverting funds to infrastructure and server stability
- Terrible customer service
Who needs a crypto trading bot platform that misses trade executions, goes offline during critical market moments, or doesn’t listen to its community? Check reviews before pulling the trigger and you’ll make passive income with fewer headaches.
How to Make Passive Income With a Crypto Trading Bot
To make passive income with a crypto trading bot, you need to know the basic steps. Here is a quick guide to using a trading bot platform the right way.
1. Figure Out a Few Strategies
After choosing a good platform, it’s time to experiment with bots, but wait, you’ll have to pick a strategy first. Bots tend to have pre-made strategies created by the developers. However, some platforms also allow you to program your own strategy. Programming your own trading strategy implies writing scripts that instruct your bot to follow certain technical analysis (TA) rules when monitoring market data.
You can program bots to follow a technical analysis-based strategy and execute trades based on special conditions in the market. Trading indicators also assist in TA and you can combine them with other strategies to program your crypto trading bot.
I can’t recommend a strategy since they’re not universal. A strategy can be terrible for one trader but great for another. It might be too slow, not accurate enough, or it can focus too strongly on risk-taking.
If you’re experienced with TA, I’m sure you’ll have no problems programming a bot yourself. But if you’re in need of a pre-made strategy, I recommend the following options:
- Portfolio rebalancing
- Market making
2. Backtest Strategies and Select The Best One
Backtesting is a simple process where you check a strategy’s performance beforehand by comparing it against historical market data. It’s like trading a strategy in the past and seeing how it would fare. Backtesting allows you to verify a strategy’s effectiveness so that you don’t needlessly trade with a bad strategy.
You can backtest strategies manually through TradingView and their replay feature. However, you can also do automated backtests with crypto trading software. I recommend using the latter if you want to backtest multiple strategies without spending much time.
3. Apply Your Strategy to a Crypto Trading Bot
Now that your strategy is hopefully good enough for the market, it’s time to try it out. Apply the same settings as with the backtest when using a crypto trading bot and start the automation. The strategy should perform similarly to your backtest. If it doesn’t, revisit and optimize the strategy.
If the strategy is successful, you might already be done. You should monitor your crypto trading bot to see if it provides consistent results. But as long as the bot is profitable, there’s nothing else for you to do.
4. Revisit, Optimize, and Re-test Your Strategy
Did you have bad luck with your strategy? Revisit and optimize the strategy before playing around with the trading bot again. You should remove the aspects of the strategy that make it weak and apply different rules or indicators. After changing the strategy, you need to backtest it again to verify its performance.
Once your backtesting is complete, head back to step three and apply the strategy. If successful, you can sit down and relax. But if not, repeat step four again. Just be careful not to get yourself stuck in a loop.
Are Crypto Trading Bots Safe?
Crypto trading bots are generally safe because they interact with user funds by utilizing API keys. An API Key is similar to a secret username and password that your exchange and bot use to communicate and execute orders. Once you connect your bot with an exchange through an API Key, the exchange will approve all orders coming from the bot.
The secret to a safe crypto trading bot experience is keeping your API key private. Don’t share it with other investors and avoid scammers. People might impersonate your bot’s customer support and contact you through various ways. To avoid scams, talk with the team exclusively through official communication channels.
However, another important aspect of a bot’s safety is stability. A bot that fails to execute an order is as dangerous as a bot that doesn’t keep its API keys safe. What if you had a $5,000 long position open and the bot failed to execute a stop loss order in time? You’d lose your money as the exchange liquidates the position.
If you’re in need of a reliable, secure, and feature-packed crypto trading bot, I recommend trying out Shrimpy. Shrimpy is a solution for investors who want to beat the HODL and wish to profit larger sums of money by periodically rebalancing their portfolios instead.
To learn more about crypto trading bots, I recommend reading the following articles: