From arbitrage to portfolio automation bots. The 24/7 opening hours of the crypto market has necessitated the use of trading automation for investors that are involved in trading cryptocurrencies. While there are multiple ways one can go about automating their trades such as copy trading, coding their own trading bots, or even relying on algorithmic trading firms, this guide will be focused on productized crypto bots currently available on the market for individuals with different trading strategies. This will allow users with little experience in trading and/or coding to automate their trades for their preferred trading strategies.   Crypto trading bots may differ by functions and complexity, but generally serve the same purpose of helping users automate trades on their linked exchanges. Broadly speaking, there are 4 main types of trading bots – Market Making Bots, Arbitrage Bots, Portfolio Automation bots, and Technical Trading bots.   

1. Market Making Bots 

Market making generally involves an individual or firm to place both buy and sell orders to provide liquidity to the market and profit from the bid-ask spread when both buy and sell orders get fulfilled. Broadly speaking, assets that are more frequently traded are more liquid and have tighter spreads. This means that they tend to be less profitable for market makers.  Traditional financial assets tend to have institutional market makers that are appointed by stock exchanges due to high capital requirements and regulations, causing this strategy to be inaccessible to the majority of traders for traditional assets. However, the lower transaction fees and capital requirements for cryptocurrency trading have allowed retail investors to profitably engage in market making especially for newer cryptocurrencies.   While popular cryptocurrencies such as Bitcoin and Ethereum tend to have extremely tight bid-ask spreads, newer cryptocurrencies that have lesser liquidity and relatively inefficient markets tend to have larger bid-ask spreads due to inefficient pricing mechanisms. This has provided traders with greater opportunities to profit from larger Bid-ask spreads.   There currently exists a plethora of market-making bots available for users to use. Popular market making bots include the open-source software Hummingbot and Cryptohopper. Hummingbot is an open-source software that allows users to easily set up a market-making bot for free while Cryptohopper requires a Hero subscription ($83.25/month) for users to easily set up a market making bot with complex market-making strategies.     

2. Arbitrage Bots 

There are many ways to trade using arbitrage, such as simple arbitrage, triangular arbitrage and convergence arbitrage. We will only focus on simple arbitrage to keep the article short.  Profiting from simple arbitrage involves the simultaneous buying and selling the same cryptocurrencies on different exchanges and profiting from the price difference. This trading strategy allows users to profit regardless of the price trend of any cryptocurrency. A well-known example of arbitrage in the Cryptocurrency space was the Kimchi Premium back in 2017, where the price of Bitcoin was significantly higher on South-Korean Crypto exchanges compared to other international crypto exchanges. This allowed traders to profit from well-timed arbitrage trades by buying Bitcoin at a lower price on international crypto exchanges and selling them on South-Korean Crypto Exchanges for a higher price. Unfortunately, the Bitcoin Kimchi Premium phenomenon is hard to find today, and such risk-free opportunities for profits are increasingly harder to come by in the crypto market. However, price differences tend to exist for newer cryptocurrencies that are not as liquid and thus are more likely to have different prices on different exchanges.  Automatically finding mispriced cryptocurrencies on different exchanges by using a bot allows users to make quick trades and profit from arbitrage opportunities. Prominent offerings of such bots include Cryptohopper and TradeSanta that allow users to set up arbitrage bots across a few exchanges with a premium subscription.   

3. Portfolio Automation Bots

Unlike Arbitrage and Market making strategies, portfolio automation takes on a more passive investment approach aimed for long-term returns. Such bots generally take a pool of user-supplied funds to purchase a basket of different cryptocurrencies from a crypto exchange to build a crypto portfolio. These bots usually have portfolio tracking tools and automated rebalancing tools to ensure that the portfolio retains its proportions of different cryptocurrencies, maintain its risk profile, and potentially enhance long term returns. Such a strategy is based on portfolio theory and aims to help the user profit from the growth of the crypto market as a whole over the long term instead of a few individual cryptocurrencies.  While portfolio bots may not be the first thought upon mentioning a crypto trading bot, popular portfolio automation bots such as Shrimpy and HodlBot are rather well known within the crypto trading space. Shrimpy is a freemium web application that allows users to do copy trading, indexing, portfolio rebalancing, and track performance of their crypto portfolios across different exchanges on a single platform. On the other hand, HodlBot charges users differently based on their account values for a bot that allows users to automate their crypto portfolio investments and rebalancing.   

4. Technical Trading Bots 

Last but not least, Technical Trading bots are the most well-known type of bot that comes to mind when most people hear the term “Trading Bot”. This is probably due to the fact that most people associate trading with technical trading and such trading bots are the easiest for beginners to start trading cryptocurrencies automatically.  Technical trading bots generally rely on Technical analysis and utilize statistical tools and indicators to automate trades for users. Popular tools used by such bot are Exponential Moving Averages (EMA), Relative Strength Index (RSI), and Bollinger Bands.  These statistical tools are usually used in tandem to determine whether an asset is currently overbought or oversold relative to its price history and whether a trader should exit or enter either a short or long position. While past performances are not indicative of future performances, such bots usually come equipped with backtesting functions that will show a trader how well his trading strategy would have performed in a certain historical time period, allowing traders to fine-tune their strategies.  Technical trading bots are the most popular trading bots currently on the market today and there are many bots available targeting users of different experience levels. For the advanced traders, bots such as the aforementioned Cryptohopper allows users to automate complex trading strategies that make use of customized indicators with a premium subscription. Similarly, bots such as TradeSanta and 3Commas are targeted towards traders with slightly more experience and larger budgets to automate their crypto trades. Using such bots may seem daunting for many beginner crypto traders due to reasons such as high subscription costs and complex features that make it difficult for inexperienced users to set up trading bots. CryptoHero was designed to address this problem by providing a beginner-friendly user interface with a free subscription to empower even the most inexperienced traders to automate their trades.    

Summary 

We hope that this guide has been useful in showing beginners the different types of crypto trading bots available on the market and the popular trading bots in each category. If you still remain skeptical of crypto trading bots, the CryptoHero mobile app has a paper trading function to allow users to experience simulated Cryptocurrency trading without linking to their personal exchange accounts or paying a single cent.