The stock market’s recent volatility has been accompanied by a similar path for digital currencies like Bitcoin (BTC), as the Fed’s anticipated rate hikes have put pressure on growth-based assets. Since reaching an all-time high of over $68,000 in November of last year, Bitcoin was trading just below $30,000 to start the week. Year-to-date, it’s down over 35%.
As the central bank looks to tighten its monetary policy and raise rates, the goal is to rein in inflation. That said, the approach tends to reduce investor’s appetite for risk. With the Fed enacting two rate hikes over the past months, Bitcoin’s slide has accelerated. Last Thursday it plunged below 25,000 for the first time since December of 2020.
Talking TerraUSD
One of the more recent events contributing to crypto’s struggles involves stablecoin TerraUSD (UST). By design, the coin is intended to be “pegged” to the value of the US dollar. Algorithms are used in an attempt to make sure the token doesn’t lose this peg.
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Last week both TerraUSD and its digital coin counterpoint Luna (LUNA) more or less lost all their value, and the blockchain on which they trade had to briefly shutdown operations. In essence a run had been created on both assets, losing the dollar peg. Currently Luna is trading near zero one month after reaching $119, and TerraUSD is right around 20 cents.
Shaky Stablecoins
There’s a perception among some industry observers that the TerraUSD fiasco could end up being a good thing for the crypto industry overall. If it happened later, after continued speculative growth for digital assets, the resulting fallout may have caused a 2008-style collapse for the decentralized finance industry.
Now, the likelihood is stablecoins will come under more strict regulation. A top SEC official reportedly indicated this to be the case, according to Reuters. Just last week, Treasury Secretary Janet Yellen spoke about the need for more crypto regulation. For investors who saw value disappear in the collapse of TerraUSD and Luna, forward thinking may not provide much relief, but for the industry it could represent painful progress.
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A beginner’s guide to crypto trading bots
Crypto trading bots are just what they sound like: programmable, virtual robots that make automatic trades. A human trader can program a trading bot to follow certain rules and execute particular trading strategies. A bot can either send signals to its user or execute trades automatically as market conditions change.
This type of trading is also sometimes referred to as “high-frequency trading” or “algo trading” because it allows for many trades to be placed quickly and relies on computer algorithms to follow pre-set rules.
In the United States, the share of high-frequency trading in equity markets is estimated to be 50%. While similar data hasn’t yet been collected on crypto markets, a significant portion of the trading activity on most cryptocurrency exchanges may also happen at the hands of bots.
Related: Guide to taxes and cryptocurrency
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Trading cryptocurrency, or any asset for that matter, can be a lucrative but difficult task. Investors looking to build a well-balanced crypto portfolio might choose to take every advantage they can.
Timing the market is not an easy thing to do. The vast majority of actively managed investment funds in the world of traditional finance never outperform the major benchmark indexes. It’s not unreasonable to assume that the same might be true for crypto markets when it comes to hedge funds or retail traders.
One of the many reasons individual investors and teams of institutional investors may fail to beat the market in the near term might have something to do with trading bots. Bots can make decisions in milliseconds, making them hard to beat.
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The crypto bot can accomplish this by either:
- Sending trade signals to the user
- Executing buy or sell orders automatically
In the first instance, users would be notified the moment certain market conditions are met, at which time they could execute a trade manually. This might be a simpler version of a bitcoin trading bot.
What most traders are after is the second option: A crypto trading bot that can do more than send real-time signals to a human trader—one that can track things like price movement, trading volume, demand, buying or selling pressure and other variables.
Bots can execute many trades in a fraction of the time it would take a human to place a single buy or sell order.
Crypto trading bots are designed to be used by traders to act on market changes the moment they happen. Rather than waiting for something to happen before trading, or using a simple stop-loss or stop-limit order, bots can be programmed to wait for certain signals and trade accordingly.
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A bitcoin trading bot that executes trades automatically works by interacting directly with a cryptocurrency exchange and placing buy or sell orders when certain predetermined conditions are met.
In terms of the user interface, trading bots work in a variety of ways.
Some come with an internet browser plug-in that allows the trader to interact with the bot. Others have standard operating system clients that come as downloadable apps. And some come in the form of software designed for cryptocurrency exchanges.
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Trading strategies also involve multiple methods:
- One common method relies primarily on exponential moving averages. A bot might be programmed to place particular trades when this indicator moves beyond a certain point.
- Some bots use variants of the EMA approach, such as double exponential moving average or triple exponential moving average. A moving average is derived from the average of price movements over a set period of time, e.g. a nine-day moving average or 50-day moving average.
A double exponential moving average combines data from two moving averages to make decisions, a triple exponential moving average uses three, and so on.
Other automatic trading indicators sometimes used by crypto trading bots include the relative strength index and certain regression analysis techniques.
Basically, bots use technical indicators (which are based on mathematics relating to price action) to make decisions.
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A human trader might use technical indicators when looking at a chart and try to plan trades accordingly. Obviously, doing so takes a long time for even the most experienced person. A bot, on the other hand, can be programmed to look at these things and act almost instantaneously.
Different types of bots also exist. While our discussion so far has focused on bots that work on a single exchange, there are others designed for what’s called inter-exchange arbitrage.
Arbitrage involves taking advantage of the price differences of a single asset across different trading platforms. If bitcoin or another cryptocurrency is trading at $10,000 on one exchange and at $9,950 on another, an arbitrage bot could buy the asset on the exchange where it’s cheaper and sell it on the one where the price is higher.
These methods can sometimes be used in conjunction with one another.
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Automated trading is a well-known and legal activity across most financial markets. Half of stock market trades in America are automated, and the process is 100% legal.
Likewise, in most countries and on most cryptocurrency exchanges, there are no laws that prohibit the use of crypto trading bots. That said, it can be helpful for investors to familiarize themselves with cryptocurrency rules and regulations before diving in.
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A crypto trading bot can be profitable when used carefully and under the right circumstances.
When placing large volumes of orders over a short time span, it becomes possible to rack up profits by squeezing out small gains on each trade. Of course, losses could quickly mount as well.
Perhaps one of the biggest benefits of a crypto trading bot is that it takes the emotion out of trading. Greed and fear can harm a portfolio and even the economy.
When things go up, investors tend to get greedy, and this can make them biased to the point that they might miss changing market conditions until it’s too late to take profits.
When things go down, investors tend to get fearful, and they might make bad decisions while in a state of panic, like selling at the bottom of a downtrend.
However, using a crypto trading bot doesn’t work in “set it and forget it” fashion. To begin, a trading bot strategy will be needed. On top of that, it could be wise to consider the fact that markets don’t always trade on technical analysis alone.
Bots aren’t capable of recognizing fundamental market forces like big news headlines or rumors (as when PayPal announced it would allow users to buy and sell crypto on its platform).
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When choosing a crypto trading bot, there are some considerations an investor will want to pay attention to:
- How complex is the bot? Beginners might prefer to use bots that employ existing strategies.
- Fees should be clearly outlined up front, with no hidden costs.
- What’s the credibility of the team that created the bot? Do they display their contact information, offer a support team, and offer a public profile?
- Word of mouth counts—what do others have to say about the platform? (This info can be gained from other crypto investors as well as online research.)
- What strategies does the bot use? For investors with a preference—such as arbitrage, for example—this matters.
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Trading bots are a potential way to begin investing in cryptocurrency. A bot can send signals to its user or execute trades automatically and lightning fast. And a crypto trading bot can take the emotion out of trading in cryptocurrency, which has a higher degree of risk than traditional investments.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
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