Crypto Trading Bot

What a crypto trading bot does

A trader normally watches a price, decides, and clicks buy or sell. A bot does the clicking by rule. You give it settings, such as a price range, an order size and a rule for when to act. It then checks the market again and again and sends orders when the rule says so. It can work all day and night, which is the reason people use one. It does not think. If the rule is poor, the bot repeats a poor rule faster and without tiring.

Most bots do not hold your money. Your coins stay on an exchange account and the bot sends orders to it through an API key. That key is a long secret text that proves the program may act on your account. It can be limited to certain actions, and that limit is the most important safety setting you control.

The main types of crypto bot

• Grid bots place a ladder of buy and sell orders at fixed price steps. They make small gains when price moves up and down inside a range, and they stall or hold a loss when price leaves the range. Read grid trading bots and the fees and costs of a grid.
• DCA bots buy a fixed amount on a schedule, or buy more as price falls, to lower the average cost. They never sell at a loss by rule, so a long fall ties up cash. See DCA bots.
• Martingale bots add to a losing position, usually by doubling. One win recovers earlier losses, but the size grows fast until the account cannot afford the next step. See martingale bots.
• Arbitrage bots try to buy and sell the same asset in two places, or round a loop of pairs, to catch a small price gap. Fees and speed decide whether anything is left. See triangular arbitrage.
• Signal and indicator bots trade when a rule such as a moving average cross or an RSI level fires. They are only as good as the rule and the test behind it.

Fees: the cost on every order

An exchange charges a fee on each order, often a percent of the order value. A buy and a later sell are two orders, so a round trip pays the fee twice. On top of the fee, the spread (the gap between the best buy and sell price) and slippage (the gap between the price you expected and the price you got) take a share. The fee schedule varies by exchange and by your trading volume, so check the one you would pay. A bot that trades often pays these costs often, so a small fee is not small for a bot.

A worked example on made-up numbers

A made-up bot buys $100 of a coin and sells it after a 0.6 percent rise, over and over. Each round trip pays the fee twice, once on the buy and once on the sell. The gross gain is $0.60. The table shows what is left at four made-up fee levels.

The last column is the lesson. If the coin falls 15 percent after a buy and the bot holds, that one position is a $15.00 loss on paper. At 0.1 percent per side the bot needs 38 clean round trips just to repay it. At 0.25 percent it needs 150. The numbers are made up, but the shape is real: many small gains, a few large holds.

Custody and API key safety

Custody means who holds the coins. With a bot on an exchange account the exchange holds them, and the bot only sends orders. When you create an API key, most exchanges let you choose what it may do. A sensible set is: read balances, place and cancel orders, and never withdraw. Many exchanges also let you restrict a key to named IP addresses, which means a stolen key will not work from anywhere else. The exact options vary by exchange, so read yours.

• Never share a key in a chat, a screenshot, a forum post or a support ticket. Treat it like a password.
• Give each bot its own key so you can cancel one without touching the rest.
• Keep only the money the bot needs on the account it trades.
• If you do not understand a permission, leave it off.

The same care applies to the program. See open source crypto trading bots for how to review code before you run it.

How a crypto bot fails

• The trend leaves the rule. A grid sits at the bottom of its range with coins that keep falling. A DCA bot spends its cash on the way down. A martingale bot reaches a step it cannot pay for.
• Costs beat the edge. The made-up example shows how fees alone can turn a small gain into nothing.
• Leverage. A bot trading with borrowed money can be closed out by the exchange. See liquidation price.
• Bad data and outages. A dropped connection, a rejected order or a frozen exchange can leave the bot half done.
• A backtest that lied. Past results can be shaped to fit. See overfitting and backtesting.
• Security. A leaked key, a fake download or a bot that asks for more access than it needs.

What this page does not tell you

It does not say that any crypto bot makes money, or that yours will. Crypto prices can move a large amount in a day, and no rule survives every market. It gives you the terms and the arithmetic so you can read a bot's claims and settings. Test with a demo account or paper trading first, and keep the size small enough that you can accept the loss.