Last year, a surge in Ethereum gas prices was ascribed to trading bots elbowing their way to the front of the queue of transactions waiting to be completed on the blockchain. Even as early as 2017, coordinated bot activity was also blamed for the see-saws witnessed in the price of Neo, a blockchain similar to Ethereum, that enables smart contract applications. And in 2019, the Financial Times weighed in, saying the mere presence of bot activity in exchanges is an “example of cryptocurrencies’ failings.”
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Given this criticism, it’s fair to extrapolate that bot trading is almost exclusively the domain of deregulated finance. But that couldn’t be farther from the truth. According to JP Morgan, trading conducted by humans on traditional equity exchanges only accounts for 10% of all volume. At the same time, quantitative and passive investment funds, run by robo-investors, now control about 60% of all equity assets. And it’s not like these bots have manipulated prices to their advantage; investment funds run by statistical models have delivered lower returns than those managed by human investment managers.
Coordinating trades among millions of bots to pump and dump coins is, of course, unacceptable behavior but such manipulation in crypto markets is overblown. If bots were really that bad, they wouldn’t have gained a foothold in the equities industry.
Unless you’re a day trader, it’s likely that you can’t check crypto prices often throughout the day. There’s work, calls, and household things to tend to. Crypto trading bots can operate on simple rules such as price ceilings on when to buy/sell certain coins and when to hold if there’s volatility. The automation is there to make your life easier, preventing you from having to furiously check the prices on your phone before executing a trade.
If you wanted to, a crypto trading bot could also run more advanced functions. They’re able to analyze, synthesize, and interpret market data and hedge it according to perceived risks.
The prices of coins can vary slightly across different crypto exchanges, and an arbitrage crypto trading bot can take advantage of this. That’s where an algorithm is much more powerful than a human - these small variations might not be immediately apparent to the naked eye.
Other crypto trading bots will base their buy/sell decision on historical price data, further reducing the chance of human error. Some can also execute a trade depending on market factors such as liquidity and trading volume.
A crypto bot can process data and interpret market signals at a rate that humans cannot match. And when it comes to volume trading, it’s this difference of a few cents that can determine whether you walk away with a profit or a loss. The sheer amount of data points they can consider before making a decision is impressive in its own right.
What’s more, bots don’t need lunch breaks or a beer after work. You don’t have to worry about them being hungover and making a computational error. They run 24/7, and their efficacy is directly related to the script powering it.
Additionally, a crypto bot looks at a trade in a precise and calculated manner. It does not have any affection for the coin it is about to sell, nor is there any vested interest in one trade versus another. Sometimes, you can see bots working in real-time by just studying the trade history table published on the trading screen. Orders are posted that are exactly the same, in terms of size and execution price, on both sides of the order book. These are bots looking to capture the flow and make a market. Humans can be swayed by gut feelings, emotions, and other irrational impulses. Bots don’t embody these emotions.
Nonetheless, the cryptocurrency market and, to a degree, the equities market can be swayed based on sentiment alone, with a complete disregard to fundamentals. A bot won’t help much in this situation since it will not benchmark the situation with historical data or reasonable buy/sell signals. As the handler of a bot, it is essential that you also trust your instincts from time to time and take control when necessary.
There are multiple types of bots, some of which are free and others that you have to pay a fee for. Regardless of the type of upfront payment, however, all bots will take a small fee per transaction executed. And if you’re going to run hundreds of trades a day, it’s worth checking out the fine print.
The “double-spend” problem is one of the many pieces of jargon that often seems confusing to anyone unfamiliar with cryptocurrencies because it doesn’t exist in traditional finance. Understanding the double-spend problem and how Bitcoin solves it is key.
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