Crypto trading bots

What kind of trading bots are available on the market, how do they work, and how to choose properly?

Crypto trading bots

One can argue about whether there is a practical use for cryptocurrencies all day long. What you can't argue about is that cryptocurrencies have completely revolutionized trading. In the era of smartphones, twitter, messengers, and internet connected toasters it is unreasonable to ask people to stop trading for national holidays or have the exchange open 9 to 5. People want to trade 24/7 and say what you want, but cryptocurrencies are definitely here to stay if only for this reason.

Crypto trading bots what do they solve?

Of course, no human can have the attention span to watch the tickers every second and make trading decisions without taking any breaks. That is why the future of trading is through crypto trading bots.

Trading bots exist in different varieties and flavors. Some bots exist to exploit well-known market inefficiencies, some bots are designed to execute a predefined strategy, and the new generation of bots utilizing machine learning are able to adapt to market conditions in real time and perform statistical arbitrage.

Decentralized exchanges are a heaven for crypto trading bots. We fundamentally believe that in an unregulated market that works 24/7 the best path towards price stability is widespread use of trading algorithms. When it comes to Saturn Network, our goal is to make it easy to implement such bots for those who have the knowledge of how markets operate, as well as for those who know how to code and want to get into programmatic cryptocurrency trading. And those who aren't into trading themselves and do not have the knowledge necessary to develop trading bots should have a convenient marketplace of top traders and bots to choose from in order to invest.

To that end, we want to foster a community that will exchange knowledge and share best practices with each other. Today, we will start with a quick enumeration of some of the trading bots that are easy to implement. In future articles, we will focus on those individual kinds of bots in more detail and will learn how they work. At the end of each article, we will publish all the code that was used to prepare it so you can take your learnings and start tinkering with crypto trading bots on real exchanges. There is nothing like learning by doing!

Market making

When it comes to digital assets, most people care about one question, and one question only: what is the price? In reality, however, that's not how the market works. Under the hood, the price is formed by having a competitive and liquid order book of buy and sell orders. The more volume goes through an exchange, the more competitive it becomes. Thus the spread between buy and sell orders decreases, and when the difference becomes very small - there is your price.

There are some strategies that exploit such market microstructure. The most obvious, and one of the more popular strategies, is market making. Market makers serve an important role on an exchange: they provide liquidity for buyers and sellers. If, for example, you want to buy STN, you are not going to wait all day in order to find a seller. Instead, you expect to come to an exchange and select one of the existing sell orders that satisfy your price requirement. Market makers create both buy and sell orders and essentially move the market back and forth, kind of being like middlemen between various buyers and sellers that come to an exchange. We have written about this strategy before and we encourage you to read that blog post if you are curious about how profitable market making is.

Arbitrage

Another strategy that exploits market infrastructure is arbitrage. As you know perfectly well, there are never just one exchange. There is a plethora of exchanges to choose from, and each one offers different fees and attracts different liquidity. People who do arbitrage are essentially playing against market makers. Changes from trading on one exchange ripple through the whole market thanks to arbitrageurs, who find that it is possible to buy cheap on one exchange, and sell for more on another one.

Efficient work of market makers and arbitrageurs ensures that casual buyers don't need to worry about picking an exchange - all of them should have roughly the same price.

Dollar cost averaging

Dollar cost averaging is a smart strategy for buying a particular volatile asset for long-term holding. This strategy an example of predetermined behavior that is designed to minimize the risk of purchasing a volatile asset for too big a price.

When doing dollar cost averaging, you simply break down your investment fund into small equal pieces, and buy a little bit every day (or minute, hour, month - depending on your investment horizon). Let's see how it helps minimize risk on a simple example.

Let's say bitcoin is worth $9,000 today, $13,000 tomorrow, and $8,000 the day after, and you have $9,000 to invest in total. Let's compare the simplest buy and hold to dollar cost averaging.

  • Bought today @ $9,000. Total purchase: 9,000 / 9,000 = 1 BTC
  • Bought tomorrow @ $9,000. Total purchase: 9,000 / 13,000 = 0.6923 BTC
  • Bought the day after @ 8,000. Total purchase: 9,000 / 8,000 = 1.125 BTC
  • Dollar cost averaging. Total purchase: 3,000 / 9,000 + 3,000 / 13,000 + 3,000 / 8,000 = 0.9391 BTC

With dollar cost averaging, you are not that far from optimal target amount overall, but you protect yourself against an unlucky price fluctuation, such as that $13,000 price for just one day.

Statistical trading bots

These are the most coveted kinds, invented by mysterious geniuses that they call quants on Wall St. Sometimes it is possible to predict certain market behavior to an extent. For example, how the market reacts to the news, or how the overall trading is going on a lazy day. These algorithms typically work for a very short period of time, until the market learns about it and corrects itself. However, when such algorithms work, they basically print money. These are typically very hard to develop and top trading firms keep their secret sauce under strict nondisclosure agreements.

If it were possible to provide experienced traders with the tools necessary to build trading bots and connect them directly to their customers without the glorified salesforce called the bankers, that would be a truly revolutionary service.

Want to learn more about crypto trading bots? Why not join our community forum where we learn to be better traders together

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