The Future of Trading is Here: How AI is Transforming the Cryptocurrency Market

What are Trading Bots and Their Role in the Cryptocurrency Market?

Are you missing out on the profits and efficiency of crypto trading bots? We’re talking about trading bots — computer programs that trade for you 24/7, make decisions faster than humans and observe the market from more angles than any professional trader ever could. These bots started to prop up around 2013 in the crypto market and have been evolving ever since to become behemoths in the crypto market — said to be making over 80% of all crypto trades by volume. Discover how these powerful algorithms are revolutionizing the cryptocurrency market and learn how to leverage their potential for your own success.

Advantages of Using a Crypto Trading Bot

There are many benefits to using crypto trading bots. After becoming more knowledgeable, you, too, will want to include trading bots in your cryptocurrency portfolio.

1. Increased speed and efficiency: Crypto trading bots can analyze market data and execute trades much faster than a human trader could, allowing for quicker reactions to changes in the market.
2. Improved consistency and accuracy: Crypto trading bots can consistently follow a specific strategy or set of rules without being swayed by emotions or biases. This can lead to more accurate and profitable trades.
3. 24/7 operation: Crypto trading bots can operate around the clock, allowing for the potential to make trades anytime and capitalize on favorable market conditions.
4. Reduced risk of human error: Crypto trading bots can reduce the risk of mistakes or errors caused by human traders, such as incorrect orders or missed opportunities.
5. The ability to backtest strategies: Crypto trading bots can test and evaluate trading strategies using historical data, allowing for the optimization of strategies before implementing them in live trading.
6. The ability to trade on multiple exchanges simultaneously: Crypto trading bots can be programmed to trade on multiple exchanges at once, potentially maximizing profits by taking advantage of differences in prices on different exchanges.
7. The ability to trade with leverage: Some crypto trading bots can be used to trade with leverage, potentially increasing the profits from a trade.
8. The ability to trade while away from the computer: Crypto trading bots can be set up to make trades on behalf of the user, allowing for the potential to make trades even when the user is not actively monitoring the market.

Disadvantages of Crypto Trading Bots

1. Cost: Crypto trading bots can be expensive to purchase or rent, and there may be ongoing fees for their use.
2. Lack of flexibility: Because crypto trading bots follow a specific set of rules or algorithms, they may need help to adapt to changing market conditions or respond to unforeseen events.
3. Dependence on the quality of the bot: A crypto trading bot’s success depends on the bot’s quality and the algorithms it uses. If the bot is poorly designed or uses ineffective strategies, it may not be profitable.
4. The risk of loss: As with any investment, there is always the risk of loss when using a crypto trading bot. Before using a bot, it is essential to carefully evaluate the risks and potential returns.
5. Security risks: Crypto trading bots may be vulnerable to hacking or other security threats, which could lead to the loss of funds.
6. Lack of transparency: Some crypto trading bots may not be transparent about their operations or strategies, making it difficult for users to understand how the bot is making decisions.

Machine Learning in Crypto Trading Bots

Currently, almost no crypto trading bot implements machine learning at all. While the rest do not implement it to its fullest extent if any. However, machine learning could play a massive role in the future of trading bots in the future. Machine learning could work hand in hand with bots to improve their strategies and predict the market’s future by learning from previous data and training on it.

Potential Limitations of AI and Crypto Trading Bots

There can be some limitations regarding machine learning and cryptocurrency trading bots.

For starters, there needs to be more data. If you think about it, crypto arguably has not been around for that long, so there is not much data to train on. Along with all of that, it can only base its actions on previous experience. If the market conditions drastically change, AI might be unable to adapt and make poor decisions.

You can also overfit the data. The AI will be trained too close to the training data and unable to make generalized decisions because of overfitting. This often occurs when there needs to be more data, the data is of poor quality, the AI analyzes one bit of data for too long, the data is noisy, and it ends up learning that too.

Another downside of AI is that unless it is specifically trained to do so, it will not be able to respond to the news. Some crypto trades are traded strictly on news that is just a fact; Elon Musk Tweets about Dogecoin, and it goes up. So the AI may see a specific market condition and end up making a poor trade because it is unaware of the bigger picture or why certain market conditions were present.

As excellent and helpful machine learning is, many possible drawbacks must be considered when implementing it.

Possible implementation

We — BravoBot have been playing around with implementing machine learning and testing it in our private builds of the platform. Soon our bot will be creating new strategies that our users can utilize without having any additional information about trading or strategy development. Our approach will be different from the rest of the platforms. We will be using machine learning to discover new strategies with our technical analysis indicators and exit strategies by running machine learning on top of them.

Difference Between Human Traders and Bots

While it is true that some seasoned crypto traders will be able to beat bots, there is definitely a place for bots in the market. Let’s explore the trading bot’s usefulness.

Trading bots make trading more accessible. Trading alone is already a highly complex subject that takes months, if not years, to understand. While trading bots can’t replace that, they can help get people into a position where they can capitalize on movements in the market on autopilot without turning trading into a full-time job; instead, they turn it into passive income or even a part of their cryptocurrency portfolio.

As stated, bots can scan more of the market than humans can. So bots could be included as part of a seasoned trader’s arsenal rather than a full-on replacement. Some traders go out of their way to code their own once they develop their bulletproof trading strategy, so bots are not just for rookies.

A benefit of using a crypto trading bot is that bots make no mistakes. You give them conditions to look out for, and they will follow strictly to a tee. Bots have no emotion or other influences that could get them to either FOMO into a trade or exit a trade too soon due to being overwhelmed.

Bots do not always have to make trades on your behalf. They can be used to scan the market and give alerts to traders of certain market conditions. Once again, they can be used like another tool inside your trading arsenal. Do not think of it as direct competition with the trader but as another tool they can use.

Could Bots Replace Traders?

This is something that traders may worry about, and it is possible that within the next few years, we will see more and more algorithms replace traditional traders. Once a trading strategy is developed, why not just turn it into a program replicating what the person would’ve done? Nothing stops the trader from hiring a coder or coding the bot. Now with the release of ChatGPT and everyone seeing the power of AI firsthand, imagine what can be done with AI and trading bots.

What can AI not do that traditional trader can? Sure, all of them are trained in a sandbox, but how long until the sandbox is lifted and the trading AIs can read news and forums? It will absorb way more information and figure out what people will do and how the money will flow in or out of the market. This is just like any other job getting replaced by AI, but this one will make someone insanely rich fast. It is inevitable.

Dangers of Crypto Trading Bots

Just like almost anything on the internet, there are dangers involved with using crypto trading bots. Many security threats come with the crypto industry in general. Users should watch out for the following:

• Hackers: Recently, a few cryptocurrency trading bot platforms were hacked, which led to a massive loss of users’ funds in one way or another. The biggest name hacked was 3Commas, arguably the most prominent crypto trading bot platform. When choosing which crypto trading bot to use, check what steps the platform takes to keep your funds safe.
• Malware: Not all bots are hosted in the cloud by the bot provider. Some will have to be hosted by you. For bots that need to be downloaded and hosted by you, make sure you research the software provider and if they’re legitimate. Most bots require API access to your exchange, and this access in the wrong hands could lead to a loss of funds even if you have to withdraw permissions disabled. The nefarious actor could purchase a token they’re heavily invested in with your funds to increase the value of their investment and sell it back to you.
• Phishing attacks: A phishing attack is a cyber attack in which an attacker attempts to trick the victim into revealing sensitive information by posing as a trustworthy entity. To protect against phishing attacks, be cautious when clicking on links or entering login information, and verify the authenticity of any communication requesting sensitive information. Double-check all communications you receive, especially through email.

How to Increase Security When Using Trading Bots

Nothing on the internet is bulletproof. However, there are many things you can do to exponentially increase the security of your exchange and trading bot.

• Use two-factor authentication: Two-factor authentication is when you require your password to log in and a code that is either generated by an authenticator or sent to your email or phone. Use this on both the exchange account and the bot platform. Check out Authy. This is an excellent 2FA app.
• Use unique passwords: An excellent way to keep yourself safe on the internet, in general, is to use unique passwords everywhere. This can be easily achieved by using a password manager. There are many free and paid options, so make sure to pick one wisely because these become an attack vector for hackers. If you want a free solution where you do not depend on any external company, check out KeePassXC.
• Whitelist IPs for your API keys: Whitelisting IPs for your exchange API keys makes them only usable on those specific IPs. If a hacker can steal API keys from the trading bot platform and you have whitelisted IPs, they will not be able to use them unless they also manage to steal access to the server with which the bot makes its trades. Binance recently made this a requirement.
• Use a secure connection: If you are accessing your crypto trading bot account over the internet, use a secure connection, such as a virtual private network (VPN), to help protect your data from being intercepted by hackers. We can’t recommend Mullvad enough for this — cheap and very security orientated, you can pay for it with Monero with no KYC or account creation.

Trading Bots and DeFi

Decentralized finance (DeFi) refers to a movement to use blockchain technology to create financial applications that are open, transparent, and secure. These applications, built on decentralized networks like Ethereum, aim to offer alternatives to traditional financial services, such as lending, borrowing, trading, and payments. DeFi applications are often designed to be accessible to anyone with an internet connection, regardless of location or financial status. DeFi has the potential to disrupt traditional financial systems by providing users with more control over their own assets and increasing access to financial services for underbanked or unbanked populations.

DeFi Trading Bots

Trading bots certainly have a role in DeFi however, their functionality will be slightly different.

• Fees: Currently, most trading bots in centralized exchanges depend on making small profits often, so for this to work, you require low fees. The drawback of DeFi is that their fees are high, sometimes a few dollars which to some people would be multiple percentages of profit.
• Signing of transactions: On centralized exchanges, you do not have to sign the transactions with your wallet each time you make a trade. However, on decentralized exchanges, you will have to either send all of your funds to the bot’s wallet or have the bot have the ability to sign every transaction, either way, you’re giving up full control of your funds that you would not have to do with a centralized exchange bot.
• Low liquidity: DEXs are known for having lower liquidity than CEXs, meaning that trades on a DEX may significantly impact the price of a coin. Additionally, the lower liquidity of DEXs may result in higher costs for users, as they may need to spend more to buy or sell a particular coin. This would once again make trading bots drastically less efficient.

Conclusion

Crypto trading bots have been around for a very long time, way before the 2017 bull run. They have many advantages that could, in the future, replace human traders. However, their benefits also come at the cost of multiple drawbacks where some can be mitigated by the user. While more is needed to replace seasoned traders, bots can be a powerful tool to serve people who wish to profit from crypto’s volatility without spending months or years learning how to and turning it into a job. Also, bots can be a great addition as a portfolio diversification method.

As we move further into the world of artificial intelligence around us, AI will likely be implemented into trading bots. Bots can absorb more information than regular people and act on it faster. Now imagine if AI can do that all and absorb news and updates of projects while making plays that profit people because the AI will be able to predict human action.

Crypto trading bots have a place in the crypto market, and as they grow and evolve, there will be even more reasons to use one.