How do Bitcoin trading bots work and are they worth it?

By:

Prash Raval

Prash is a financial writer for Invezz covering FX, the stock market and investing. For over a decade he has traded spot FX full time while... read more.

 & 

James Knight

James is a lead editor for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets. His ... read more.

Updated: Nov 15, 2022

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Bitcoin robots are pieces of trading software that place crypto trades for you automatically. This guide explains how these crypto trading bots work and whether you can make money from them.

How do Bitcoin trading robots work?

They work through a three step process: first they perform data analysis, then they pick out trading opportunities and decide how much weight to allocate to a potential trade, and then they send a signal to place a trade on a crypto exchange.

Most of the time, this is all entirely automatic. The bot uses APIs – software that allows computer programs to communicate with each other – to grab the latest crypto market data and to connect to your exchange platform. All you do is direct the operation by telling it what sort of data to look out for, what trades to send you, and how risky you want those trades to be.

Once you’ve linked the bot to your exchange account, you manage the rules that govern how the bot acts from a dashboard. Whenever it identifies a trading signal, it sends an instruction to your exchange with all the details in, and places the trade automatically.

How to set up your crypto bot

Here is a quick three step guide that explains what you need to do to get a Bitcoin bot to work for you.

1. Connect it to the Bitcoin market via an API

Bots can only work if they’re connected to a crypto trading platform that has a wide range of cryptocurrency markets available. Some examples of exchanges that you want your bot to connect with are Binance, Coinbase, and Huobi. Bitcoin robots link to these platforms through APIs, which are secure keys and provide the ‘bridge’ between the two. 

You can find the exchange API very easily in your account settings. Once you have that string of numbers, you copy it into your crypto bot so that it can immediately connect and get data from the exchange. We advise that you backtest the robot before you do this – it’s best to only give access to software that you trust and want to use moving forward.

Once a bot has been connected to a trading platform you can then configure it and change the settings, to adjust how big the trade should be, entry and exit points, stop-loss limits, etc. All of this serves to give you quite a lot of control over how the bot operates, and you still have the option to place a trade manually if you want as well.

2. Programme the bot to perform crypto market analysis

Automated crypto software scans market data and interprets it before deciding whether to buy or sell a particular digital asset for you. The majority of Bitcoin trading robots allow you to customise what data is analysed before a trade signal is generated. You need to set this up before you start trading.

In many cases, this is as simple as choosing from a preset list of strategies. You might be able to choose from a dollar cost averaging strategy that invests a fixed amount at regular intervals, all the way up to strategies that use highly advanced technical indicators to time entry and exit trades.

You can also design your own strategy. You choose from a list of indicators that you want the bot to base decisions on, which can be simple indicators such as RSI’s, oscillators, and trading volume, or more complex data like depth of market and order books. 

3. Set your risk parameters and start trading

Finally, you can tweak the settings before setting the robot off into the wild. This means setting the maximum level of risk you’re willing to accept on any trade, and deciding on how tight you want the stop-loss orders to be. Some bots let you adjust risk based on the strength of the signal.

The tighter your stop-losses are, the less likely you are to make a big loss, but you may miss out on opportunities by auto closing trades after a small pullback. Ultimately, it’s a balancing act and only you can decide the right approach for your trading bot.. 

When a trade has been executed it will be shown in the open positions section of your trading account. All trades that are made by a robot can be accessed in your trading history on the exchange you connected your bot to, and are also recorded on the bot itself.

How to choose the right trading strategy

When you sign up to a crypto bot, you can normally choose from a number of templated strategies, or create your own. These work through a fairly simple ‘if this, then that’ set of instructions. For instance: if the Bitcoin price increases by 10%, place a buy order.

There are an almost infinite number of possible strategies, but there are a handful of factors that can help narrow that choice down. For instance, do you want to take a long term view and invest in the market gradually over time? Then a dollar cost averaging strategy might be best.

If you want to jump into the latest trends, you can choose a trend bot that buys in whenever a cryptocurrency increases in value by a certain amount. Or if you want to take a much more short term approach, you can choose one based on a specific set of technical indicators, such as candlestick patterns, oscillators, or moving averages.

Are Bitcoin bots legal?

Yes, crypto trading bots are legal as long as cryptocurrency trading is legal where you live. There are only a handful of countries that have banned crypto entirely, such as China, Egypt, and Morocco. Outside of those countries, it’s completely legal to use a crypto bot.

Are crypto robots worth it?

A good crypto bot is a great way to trade. Some bots, like those used by developers and well funded investors can make substantial amounts of money. A report published by Bloomberg in 2022 suggests that some crypto robots have made hundreds of millions of dollars recently. 

However, the crypto market is largely unregulated and there are lots of bots out there that are either scams or clever marketing ploys to draw in beginners who are looking to make a quick buck. These types are almost always unprofitable and it’s best to stay away from them.

Sticking to bots like Cryptohopper, Coinrule, and 3Commas is the best bet. These are well-respected automated trading services that all link up to top tier crypto exchanges. Using one of those bots can be a good way to trade crypto if you don’t have the time or expertise to make decisions yourself.

How to tell if a crypto bot is profitable?

The easiest way to find out is to use one yourself. Not many crypto exchanges have demo accounts so to test a bot you will need to use real money, although some brokerage platforms do offer simulation mode where you can test the software. Below are five ways to tell if a bot is profitable. 

• Backtesting. If you’re using a bot to trade your own strategy then you can use the software to go back in time and sell how well it would have performed. Backtesting can be completed very quickly so it’s an easy way to check if a bot would have made money in the past. Historical performance is no guarantee of future profits, but it’s generally a positive sign if the robot allows you to backtest it properly.
• Forward testing. You can use a crypto bot in live market conditions as a way to test its profitability. It’s important to note that using forward testing you’ll have to use live funds, so it’s best to make sure you commit only a small amount of money in case it doesn’t perform well. If it does generate profits, you can start using more money. 
• Demo mode. Some crypto trading platforms let you get a feel for the markets using a demo account. A demo account replicates live market conditions with simulation money. This is a good way to use forward testing without risking any of your money. Not all platforms offer demo accounts so you’ll need to find one that does. 
• Reviews. Before you start using a cryptocurrency trading robot you can check online reviews to find out how well it performs according to other users. There are lots of forums and review sites where you can find information on a wide range of bots. Reviews can not only tell you  if a bot is profitable, but if it’s a scam or not. 
• Inspect its code. If you’re able to read computer code then you could check out the code for any bot before using it. While this method may not entirely let you know if it’s profitable, you will gain a good understanding of how it may perform in the future by inspecting its code and security.

How much can a cryptocurrency bot make?

It is possible to make money using a crypto bot, but exactly how much you can make depends on lots of factors. If you start out with a large sum and are prepared to take a lot of risks, you could make lots of money. That strategy makes it more likely that you’ll lose money as well, though.

For most people, a 10-20% overall profit represents a successful strategy. Even an automated strategy is going to lose sometimes and you should use risk management features, like stop-loss limits, to minimise your potential losses.

Crypto trading bots: the pros and cons

Crypto bots are fast, efficient, and simple to set up. They take the emotion out of trading, basing decisions purely on what data analysis says instead. They can be a good opportunity to learn about how to identify winning (and losing) trades. However, there are obviously some potential drawbacks as well.

The most obvious is the number of potential scam bots out there. It can be hard to tell the difference between a good bot and a scam. Since you have to hold your money in third-party exchange accounts, handing API access to a bot can be risky. You also need to have the time to manage and maintain your bot to ensure the best performance.

What should I do now?

If you’re ready to go ahead and use a bot, then you should take time to thoroughly research the platform before you sign up. Take advantage of any opportunity to backtest its performance, and use a demo account or a trial period to test it on live markets if possible. Start small and keep a tight rein on risk management early on in order to protect yourself and your money.