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How Effective Are Cryptocurrency Bots?

Cryptocurrency bots and crypto trading strategies - are they effective

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Cryptocurrency bots are advertised as a quick and easy solution for investors to help automate trading and autopilot their passive income. If crypto bots are useful, why isn’t every professional trader adopting these tools? Furthermore, can one simply outsource their trading responsibilities to a computer program and still make money?

If you’re into cryptocurrencies, you’re probably aware of the market’s extremely volatile price swings. Traders can experience extreme gains and losses in a few hours. Many investors are therefore keen to leverage crypto bots to increase profits and save time.

However, before committing to a crypto bot, it’s important to recognize the bot as a tool that aids the original strategy. While many factors determine a bot’s success, you should ensure that your trading strategy is strong and robust. If implemented correctly, a bot can enhance the trader’s investing strategy to collect further data and insights. If its underlying algorithm and framework is designed poorly, it would amplify the investor’s lack of control and losses.

To be clear, this article is not about the different types of cryptocurrency bots available. Nor is it a review of existing off-the-shelf options. It’s instead a general overview that outlines whether cryptocurrency bots are effective, and highlights the factors influence their success.

The success of a cryptocurrency bot is largely dependent on its creator

Cryptocurrency bots are tools that make trading decisions based on an algorithm. While traders are responsible for using the bot effectively, the bot’s success is dependent on the original algorithm, which stems from the developer’s knowledge of the causal relationships within the cryptocurrency market and the outside world.

Crypto bots are seen as a software program that can quickly observe trends, follow up with decisions, be online 24/7, reduce error, make rational and emotionless decisions, and process information quickly. Traders buy bots because it gives them more time and flexibility.

While bots can offer convenience, it’s important to understand the differences between an off-the-shelf crypto bot and a custom-built bot. Off-the-shelf bots are very convenient for traders who do not possess the ability to program. Furthermore, they offer an insurance option that allows traders to sell their holdings if the market dips below a certain point. The bots are also connected to the cryptocurrency exchange’s electronic order books. The bots generally have a trading strategy, while other bot providers allow you to develop your trading strategy within their existing framework. Examples of off-the-shelf bots include Haasbot, Tradewave, and Cryptotrader.

However, when it comes to testing and implementing new strategies, off-the-shelf bots can be very limiting. You’re essentially relying on someone else’s algorithm, strategy or framework. “Any money-making machine you can just buy and turn on will quickly get bought by lots of other people too, and there go your profits,” said Jacob Eliosoff, an algorithmic trader. “Often even the initial profits are a mirage.”

Petar Zivovski, director of operations for Whaleclub, even encouraged investors new to bot trading to consider learning how to program or to find an open-source bot they can tweak and configure based on their trading strategy.

Cryptocurrency bots may be helpful, however, if you’re going to trade professionally: with a bot, your original trading strategy needs to be built within the bot. Your strategy will most likely change throughout trading so a rigid algorithm may not be very effective.  A bot’s success will, therefore, also be dependent on your understanding of market conditions and technical ability to continuously program that bot.

A novel way of addressing the bot problem is being developed by Coinrule. Oleg Giberstein, one of the founders, thinks that it is unfeasible to expect traders to learn to code to compete in crypto’s 24/7 market. Coinrule’s solution to the problem is a “trading strategies editor” that allows users to design their own automated trading strategies through an interface – flexible, smart ‘bots’ which can be re-programmed by a user without having to write a single line of code.

Cryptocurrency bots have difficulty tracking trends that influence key metrics

Cryptocurrency bots are generally programmed to track key metrics like price, volume, and circulating supply. However, any decision and reactions on these metrics alone lead to very shallow successes. Successful traders understand the trends that influence these key metrics, and how they impact the cryptocurrency market.

In the cryptocurrency industry, price movements are tied to the perceived value of a coin in the marketplace. Any event that may occur, either good or bad, will affect the perceived value of a coin, subsequently affecting its price.

“For example, in the crypto ecosystem well known figures that are associated with successful projects can influence trade across the community,” said Amir Feder, Chief data scientist of “A single tweet on a change in market position or the expression of some strong sentiment towards future price movements are read by informed traders and analyzed carefully.”

Aside from influencer tweets, there are many other aspects that can influence a coin’s price. These range from social volume, positive and negative announcements, and changing regulations to company updates. There are also global macro trends that may seem unrelated but can affect price and volume.

Unfortunately crypto bots cannot take all these variables into account. While custom-built crypto bots can monitor news and social media, and scan for keywords, it’s impossible to account for every scenario. Using keywords as an indicator can also be highly misleading since words can be changed and flipped around.

Unlike humans, bots do not have an intuitive understanding of market conditions. These software programs will also have difficulty differentiating between real and fake news, a concerning factor that unfortunately plagues the cryptocurrency market.

A key example is the fake McAfee tweet that resulted in a pump and dump scheme originally setup in a chat room called Big Pump Signal. Big Pump Signal encouraged their 60,200 subscribers to retweet and promote the target coin. According to Buzzfeed, “when the tweet was first broadcast at around 3pm, GVT was bought and sold on the market at $30. By 3:04, it was at $45 and trading volume had doubled. But by 3:19, GVT’s price had fallen back to $30.29.”

“There are frankly a lot of groups that have now centred around misinformation,” said Laz Alberto, a cryptocurrency investor and editor of the newsletter The Blockchain Report. A pre-programmed bot tracking social news could easily pick up the fake McAfee tweet and purchase the GVT tokens, trading on misinformation.

“Algo trading is not a fire-and-forget missile,” said Tim Enneking, chairman of cryptocurrency investment manager EAM. “You don’t just let it run itself for extended periods.” While crypto bots can collect information and process it extremely quickly, no bot has an intuitive understanding of the market. As a trader, if you have or are thinking of trying out a cryptocurrency bot, it’s your responsibility to continue tracking trends that humans or only self-learning bots can comprehend.

Conditions for profitability are seemingly random

While bots can monitor and respond to price fluctuations in the market, it’s difficult to completely automate the trading process and make a profit since conditions for profitability are highly random. Crypto trading is highly unpredictable. It’s therefore tough for a crypto bot to follow a specific algorithm and continually make profits over time.

Crypto traders also take larger risks than the average person which adds to greater fluctuations in the market. While bots are extremely helpful to draw in raw data, the trader needs to be responsible for their trading algorithm and factor into account critical events that may affect cryptocurrency prices. “It took me a solid six months of trying…[until he realized] this wasn’t going to be an automated method,” said Reddit user trenno, in the Bitcoinmarkets subforum.

For example, the April tax-filing deadline in the US may impact cryptocurrency prices. Thomas Lee, head of research at Fundstrat Global Advisors believes that tax-related selling has been a critical driver resulting in the falling cryptocurrency prices.

“For younger people who don’t have taxes top-of-mind, or have never invested before, they’re shocked,” said Cathis Wood, CEO and CIO at ARK invest. “People had huge gains last year, and they don’t have enough in crypto to pay those.”

For many traders, it would not have been obvious to link the decline in Bitcoin prices with the looming US taxes ahead. It takes time and patience for traders to understand the specific events that can affect a coin’s price, let alone a computer algorithm.

The ideal cryptocurrency bot would, therefore, be a software program with a self-learning algorithm that can adjust based on present and historical data. Unfortunately, artificial intelligence (AI) still has a long way to go. The underlying algorithm, therefore, needs to be continuously tweaked by the trader to react to ever-changing market conditions.

So how effective are cryptocurrency bots? While the term “effective” is highly subjective, the off-the-shelf crypto bots are often not as helpful as they claim. The custom built bots can, however, be very useful.

However, they are dependent on a few key factors:

  1. Your knowledge and experience in the cryptocurrency market
  2. Your technical ability to create the bot
  3. Your technical ability to continuously tweak and change the bot’s functions according to the market

If this seems like a lot of hard work, unfortunately, it is. If you’re new to cryptocurrency trading, you will need to put in the effort to understand the market, upskill on programming, and continuously test the effectiveness of your crypto bot.

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