What Is The Effect Of Trading Bots On The Cryptocurrency Market?

What Is The Effect Of Trading Bots On The Cryptocurrency Market?
The Siliconreview
02 September, 2020

The automated trading system has been used by the traditional financial markets for decades. It is estimated that robots control nearly 80% of the market. With the release of Bitcoin in 2009, the cryptocurrency era began, giving trading enthusiasts another fascinating opportunity to test their skills and make profits. Although it has been more than a decade since Bitcoin was released, we are just getting started.

Manual trading and trading bots

Trading manually requires a lot of effort and screen time. Professional traders and those who already have experience in trading, which have shaped their skills well, tend to have a desire to have things under total control because their confidence level is high. But automated trading has its benefits, and there are many. Although, a trader would still need to create a strategy and create programs based around that trading strategy, which then will watch the market 24 hours a day and place trades following the defined algorithm.

The fact that computers can respond thousands of times faster than humans have made algorithmic trading attractive in the cryptocurrency sphere. The crypto market is open 24 hours a day so with a trading bot there are more chances to catch a trade than trading manually. This is known as “High-Frequency Trading”, and it has become relatively popular among high-end users.

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A healthier and more attractive market

Generally, these types of programs have been used by large financial institutions. Now, any trader can use them as it is easy to have access to such programs. Experts and advocates of algorithmic trading say that trading bots make the system much more efficient. Last few years the price spreads across exchanges have decreased dramatically, and experts associate this to an increase in bot usage. The price fluctuations across various exchanges disappear quickly, and it would be appropriate to say in general that price development happens faster than without bots.

Liquidity is also crucial when it comes to the cryptocurrency market, and algorithmic trading is enhancing liquidity. Liquidity means having enough buyers and sellers so that traders can have the belief that they can execute a trade when and where they want to. Market makers are the source of liquidity. They are entities that place buy and sell offers over the bid-ask spread and make profits from the difference. Now, the party that uses algorithms, in this case, can increase profits and boost liquidity. More big investors are then attracted, which further expands the market, generating a positive feedback circle based on this effect. On the other hand, having countless bots running all day, every day can likely create problems for the market, as well.

Other positive effects of trading bots

There are also many other positive effects of trading bots:

  • They make it easier to enter the crypto industry
  • They get rid of the emotional barrier while trading
  • They have built-in back tester tool integration
  • They operate 24/7
  • They have better order execution and faster trading speed
  • Real-time notifications
  • They improve your trading portfolio
  • You set your trading preferences
  • You can learn about the industry while making profits
  • You operate in a safe zone
  • Consistency

Final words

Industry research has concluded that at this point, trading bots are best to use when the market is in the period of sideways stagnation or during an uptrend/bull run. While hodlers may not be making money during the bull run, trading bots can take advantage of minimal price differences to generate actual returns. At the beginning of the cryptocurrency era, trading was done manually. But with the introduction of automated algorithmic trading, things got better. Whether you would want to use trading bots or not it is up to you. Although they might have some negative effects on the crypto industry, we can indeed say without any hesitation that the impact of trading bots on cryptocurrencies has been mostly positive.