Can you really make money with crypto automated trading? If you have been wondering how automated trading works, what tools to use, and what pitfalls to watch out for, this guide is for you.
In this article, we explain what cryptocurrency automated trading is, its benefits and drawbacks, how to choose the right tools, and important considerations to keep in mind.
Key takeaways
- Crypto automated trading uses software to execute trades around the clock based on rules you set in advance, without manual intervention.
- Most people start through an online platform, choosing a trading bot and connecting it to their exchange account via API.
- The main benefits are 24/7 market coverage, emotion-free execution, a lower barrier to entry for those without chart-analysis skills, and easy multi-exchange or arbitrage trading.
- The main drawbacks are that bots cannot react to unexpected news events, and that subscription or volume-based fees can outweigh the profits they generate.
- When choosing a tool, compare fees carefully, research the credibility of the provider, and confirm it supports the exchange you use.
- Automated trading generates far more transactions than manual trading, which makes accurate record-keeping and tax calculation considerably harder.
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What Is Crypto Automated Trading?
Crypto automated trading refers to the use of specialized software programs that execute cryptocurrency trades on your behalf, 24 hours a day, without manual intervention.
Trades are carried out automatically based on pre-set conditions. For example, you could configure rules such as:
- Buy $100 worth of BTC when the price drops to $30,000
- Sell $100 worth of BTC when the price rises to $31,000
These types of rules can be combined into more complex configurations known as strategies. You can create your own strategy or use one designed by another trader. In essence, automated trading means letting a program follow a specified strategy to trade on your behalf.
How Crypto Automated Trading Works
The most common way to get started with crypto automated trading is through an online platform that offers automated trading services. After creating an account and setting up a payment method, you gain access to automated trading tools running on robust servers.
These tools include trading bots, which are programs designed to automate specific tasks.
What is a trading bot? A trading bot is a program that automates repetitive tasks. In the context of crypto trading, bots are embedded with strategies or AI models. Users typically choose from several available bots based on their investment goals and risk tolerance.
To begin automated trading, you select a bot based on factors like past performance or strategy type, then connect it to your exchange account via API. In recent years, some bots have incorporated AI capabilities or mirror the strategies of experienced traders, drawing increased attention.
You can switch bots at any time, so feel free to experiment to find the one that works best for you.
Benefits of Crypto Automated Trading
24/7 Trading Capability
One of the biggest advantages of automated trading is the ability to trade continuously around the clock. To capture profitable opportunities consistently, you need to monitor the market at all times, which is virtually impossible for a human to do manually. Automated trading bots monitor charts 24/7 and execute trades whenever conditions are met, making them ideal for busy individuals who cannot dedicate hours to watching the market.
Emotion-Free Decision Making
Because trading bots are programs, they are not influenced by emotions. Most traders have experienced moments where fear or excitement led to poorly timed trades. Bots execute trades mechanically based on pre-set conditions, eliminating panic selling and impulse buying.
Lower Barrier to Entry
Consistent profitability in crypto trading typically requires significant knowledge of chart analysis and market indicators. However, when using an automated trading bot, the bot handles the analysis and execution for you, making it possible to participate in the market even without deep technical knowledge.
Multi-Exchange and Multi-Asset Trading
Monitoring multiple exchanges and cryptocurrencies simultaneously is extremely difficult for a human but trivial for a program. This makes automated tools particularly well-suited for arbitrage trading.
What is arbitrage trading? Arbitrage involves exploiting temporary price differences for the same cryptocurrency across different exchanges. By buying on the exchange where the price is lower and simultaneously selling where it is higher, you can capture the spread as profit.
By leveraging automated tools to trade across multiple exchanges and assets, you also benefit from diversification, which helps spread and reduce risk.
Risks and Drawbacks of Crypto Automated Trading
While automated trading offers clear benefits, it also comes with risks that should not be overlooked.
Inability to React to Unexpected Events
Because trading bots follow programmed rules, they may not be able to anticipate or respond to market-moving events that a human could foresee. For example, if negative news breaks about a major cryptocurrency project or its issuing company, a bot generally cannot factor that information into its decisions.
Ongoing Costs
Using automated trading tools typically involves fees. Online platforms may charge a flat monthly subscription, a percentage of trading volume, or some combination of both. Volume-based fees in particular can add up quickly and should be monitored carefully.
Some traders with programming skills build their own bots or use free open-source tools, but this approach is not beginner-friendly. If your automated trading does not generate enough profit to cover tool fees, you could end up in the red.
How to Choose the Right Automated Trading Tool
Check Fees and Pricing Carefully
As noted above, most automated trading tools charge fees. Pricing models vary widely, from monthly subscriptions to pay-per-trade and even one-time purchases. For those trading with smaller amounts, these costs can significantly impact overall returns.
Be especially cautious of tools with unusually high prices, as some may be sold through deceptive or fraudulent schemes. Always compare costs and features across multiple services before committing.
Research the Company Behind the Tool
You are entrusting your funds to the tool provider, so it is important to verify the credibility of the company behind it. Search for reviews, check the company's background, and evaluate their support infrastructure.
Many crypto automated trading tools are offered by overseas companies. As a beginner, it is best to start with a tool from a well-established and reputable provider.
Confirm Compatibility with Your Exchange
Each automated trading tool supports a specific set of exchanges. Before choosing a tool, verify that it is compatible with the exchange where you hold an account, and ideally one with competitive trading fees.
Tax Implications of Automated Crypto Trading
When using automated trading tools, the number of transactions generated is typically far higher than with manual trading. If you are also running arbitrage strategies across multiple exchanges, the volume of trade records can become enormous.
Reconciling all of those transactions manually to calculate your gains and losses is both time-consuming and error-prone. Mistakes in tax calculations can lead to penalties for underreporting.
For these reasons, it is highly recommended to use a dedicated crypto tax tool to automate the calculation of gains and losses from your automated trades. You may need to report gains for tax purposes depending on your jurisdiction and situation.
cryptact can help simplify this process by automatically calculating your gains and losses from your transaction history.
Conclusion
Crypto automated trading offers significant advantages, including 24/7 market coverage, emotion-free execution, and the ability to trade across multiple exchanges and assets simultaneously. However, it also carries risks such as inability to respond to unexpected market events and ongoing platform fees.
When choosing an automated trading tool, carefully evaluate fees, the reputation of the provider, and compatibility with your preferred exchanges. And remember that even with automated trading, keeping accurate records of your transactions is essential for tax compliance.
