Crypto Trading Bots Comparison

Why use crypto trading bots?

Getting into the world of crypto investing and trading it's an intimidating feat. Let's face it, doing the proper research and learning all the different trading strategies out there it's a time-consuming process. A process that some people dedicate a lifetime to achieve a reasonable level of mastery. How are the newbies to compete? Crypto is happening now, and we need to pull a stunt like Richard Dennis (just a guy who made $350 million off a $1,600 loan, you know, totally doable).

Luckily, you don't need a Ph.D. in the Moving Average Convergence Divergence (MACD) or The Ichimoku Cloud. With the advance in technology, even the average Joe can achieve decent profits thanks to crypto trading bots. Crypto trading bots are the best tool for beginner and seasoned traders alike for two very compelling reasons:

1. They automate trading strategies hence removing the risk of human error. They are faster, more efficient, and don't require sleep (which is helpful considering the crypto market is open 24/7). They operate according to a set of rules and, unlike humans, always follow them consistently.
2. They eliminate (for the most part) the number 1 enemy of any trader. The greatest obstacle between you and profitability, is the voice in your head that compels you to take precisely the wrong action at the worst possible moment: your emotions.

Now, before you start daydreaming about buying that shirt made of pure gold (because, why not?), let's clarify; they're not the holy grail. If trading were as simple as clicking a button to turn on a money printing machine, even the homeless would be driving Lambos. 

Fortunately, it's not rocket science, either. There are different types of crypto trading bots, each with its strengths and weaknesses. In the upcoming articles, we will dive deep into trading bots and how you can use them profitably. For now, I will give you an overview of the most popular bot types.

Crypto trading bot types

We can classify bots into four main types according to their behavior and risk profile: Signal bots, DCA bots, Grid bots, Periodic bots, and Arbitrage bots.

Signal bots

The defining features of Signal bots are a technical indicator signal that triggers the entry of the trade and well-defined risk parameters (Take Profit and Stop Loss). Signal bots are typically used to execute a well-defined trading strategy that has been backtested, and optimal take profit and stop loss are used.

Many traders use Signal bots to execute trading strategies to trade profitably manually. There is also a growing market of Signal providers who have developed proprietary signals that these bots can use. These signals are generally available for a subscription fee.

The advantages of Signal bots are that they can take emotions out of the equation and consistently follow a well-tested trading strategy. The disadvantage is that you must understand technical analysis and backtesting to use them effectively.

DCA bots (Martingale)

“Dollar Cost Average” (DCA) bots use the Martingale strategy. In this strategy, the bot would make additional orders of the asset as the price moves opposite the take profit, thus increasing position size and obtaining a better average price than the original entry price.

DCA bots typically use a signal as an entry trigger, but in contrast to Signal bots, they are often used without Stop Loss. You could argue that a DCA bot is a signal bot using DCA instead of a stop loss.

DCA bots rely on the assumption that the market will eventually rebound, betting aggressively if the price moves opposite the desired direction in expectation of a bigger payday. Though this strategy attracts a lot of newbie traders due to its high profitability and simplicity, it should be used with extreme caution as the risk is also high.

The risk profile of a DCA bot depends on the volume of DCA orders and how spaced apart those orders are. Generally, the more spaced they are, the better the ability of the bot to average down the asset's price and exit the trade profitably. The volume of DCA orders can be a double-edged sword; while having more volume as the price move against the take profit is beneficial to obtain a better average entry, if these orders are not sufficiently spaced apart, we risk using too many funds too early.

Grid bots

Grid trading is a system where a series of buy and sell orders separated at regular price intervals are placed within a price range. The bot places a corresponding sell order whenever a buy order is triggered. The goal is to profit from the price difference when the market fluctuates.

Grid bots are commonly used with crypto because of the high volatility of crypto assets. The main advantage of grid trading is that it's a market-neutral system, meaning you can profit regardless of whether the market goes up or down.

Grid bots can be used anytime; they do not require an entry signal. However, they are best used in ranging markets. Grid bots generate small but consistent profits if the price stays within the price range, making them a suitable option for inexperienced traders looking for a simple strategy with a lower risk than DCA bots.

The risk profile of a grid bot is directly correlated to the width of the range. The wider the range, the more likely the price will remain within the range. A wide range typically produces smaller profits for more extended periods. Narrower ranges can take advantage of specific market conditions; they are associated with higher risk but can make higher profits quickly.

Periodic (time-DCA or HODL) bots

Period bots are called HODL bots, buy-and-hold bots, or just "DCA" bots. The term “Dollar Cost Average,” or DCA, has been around in traditional finance for a long time. Dollar-cost averaging refers to an investment strategy whereby you would make periodic purchases of an asset over time regardless of market conditions or the asset's current price. This strategy is meant to "smooth" your average entry price instead of purchasing everything at one go (lump sum). This way, the investor is less exposed to volatility.

Effectively, both martingale and periodic bots can dollar cost average, but how they do so is entirely different. Martingale bots purchase more base at specific price drops, while periodic bots buy more at particular intervals. For this reason, I often refer to them as price-DCA and time-DCA, respectively. If you come across the term “DCA bot,” distinguish which type of strategy it is.

Time-DCA is usually used as an investment strategy, not a trading strategy, as investors typically buy and hold long-term. It's even possible to combine time-based and price-based DCA, a double-DCA technique, but that's an advanced topic beyond the scope of this article.

Arbitrage bots

Arbitrage is a trading strategy that exploits pricing discrepancies between exchanges. Arbitrage traders use price scanners to scout the market, and when they find an asset that has a price discrepancy between exchanges, they buy it in the cheaper exchange and sell it in the more expensive exchange for a profit.

Although, on the surface, this may seem like a no-risk way to get a quick profit, in reality, this strategy is prone to failure. The price difference between exchanges fluctuates constantly, and the window of action can be tiny (milliseconds). Many technical hurdles can prevent the transaction from executing fast enough (lack of volume in one exchange, for example). In addition, some factors from the exchange itself could render the strategy unprofitable, such as deposit, withdrawal, trading fees, different coins with the same ticker, KYC, regulations, etc.

Even when the arbitrage strategy is implemented successfully, the profit generated is usually tiny, so you need a high volume of transactions to make it worthwhile. However, as the market and technology mature, arbitrage strategies become more challenging to find.

Considering the difficulty in achieving such a small profit, it's challenging to recommend arbitrage as a viable trading strategy.

Crypto trading bots comparison

In this table, you can see the overview of the typical configuration of these bots.

Let's review these sections in more detail.

Expertise and oversight required

The bot with the least expertise and oversight required is the periodic bot. This bot is used by long-term investors who want to gradually increase their holdings of specific tokens independently of market conditions.

Next up, we have grid bots. Grid bots are an excellent choice for beginner traders because they don't require an understanding of market dynamics or technical indicators. The only two essential options the trader needs to make are how wide the grid should be and how many grids there will be in the range. Traders with more experience can set narrow grids to take advantage of ranging markets. In contrast, inexperienced traders can set up wide-range grids to profit from volatility for longer. The wider the range, the more likely the price will stay within the range, hence the less oversight required.

DCA bots can be suitable for beginner traders. However, choosing an adequate level of risk, depending on your expertise, is essential. The more significant the price drop that the DCA can cover, the more chance of profitably exiting the trade; hence, less manual intervention would be required.

Signal bots are typically used by more experienced traders with enough time to manage the trading strategy. These strategies require a good understanding of the technical indicators and current market conditions. The entry signal may need to be modified depending on current or predicted market conditions. They may also require ongoing optimization through backtesting and forward testing.

Finally, arbitrage bots require the highest level of expertise as there are too many moving parts to execute the arbitrage strategy profitably.

Profitability and risk

Signal bot's profitability and risk profile depend primarily on the trading strategy and how well it has been optimized. Hence, it can vary significantly between bots.

It may be worthwhile digging deeper into the difference between DCA and grid bots, as they are usually the common choices for beginner traders.

DCA bots appeal to beginner traders because of the simplicity of the strategy and the high profit potential. But it should be no surprise these bots are also the riskiest when used recklessly.

While the grid and DCA strategy buy more of the asset as the price decreases, there is also a significant difference. The grid strategy has a separate sell order for each buy, while the DCA sells all the buy orders once and starts again.

This difference in behavior results in a different profit/risk profile for each. As the DCA bot has more money “at work,” it can achieve more profit per transaction. However, this also means it is taking a more significant risk, as a price drop could result in the bot holding a considerable amount of coins at a loss, unable to sell them. This is called holding "red bags," and inexperienced traders may find it difficult to exit them with a profit. The more DCA orders the bot is configured to do, the higher the chance it will be able to lower the entry price and sell at a profit.

Grid bots usually produce higher-frequency, smaller-profit transactions than DCA bots. However, as long as the price remains within the grid, the bot continues to operate. Like with the DCA bot, a steep price drop can result in the price exiting the bottom range of the grid, and the bot will be left holding "red bags." The risk/reward ratio of the grid bot is indirectly correlated to the width of the range. That means that all other things equal, the wider the grid, the less risk, and the less profit. The wider the range, the less likely the price will fall out of range, but the less profitability the bot can achieve as it has more funds spread out. 

In either case, the trader must find the sweet spot between how safe the bot should be (more DCA orders or a wider range) and how much profit it can achieve, as these factors are inversely correlated.

The importance of backtesting and paper trading

90% of inexperienced traders lose 90% of their capital in 90 days. That sobering statistic also called the 90-90-90 rule, is a stark reminder of the inherent risk of trading bots. It's important to remember that bots are static and rule-based, while markets are dynamic. Unless you use a very safe strategy (such as the super wide range grid stack), chances are the market will change, and you will need to revise your bot strategies.

Many bot platforms offer bot templates and marketplaces. Beginner traders can fall into the trap of copying  “top-performing” bots with ridiculously high returns in the last 30 days to achieve those monster returns for themselves. However, the sad fact is that shortly after, most of these bots underperform at best or break havoc in your account at worst.

Bots that can achieve several hundred percent ROI quickly are risky, as the assets they trade likely experienced a pump and are ripe to mean-revert, leaving you with a pretty red bag. That's why it's crucial to choose consistency over short-term profitability.

When choosing which bots to copy, ensure you have backtested results for at least a year. Also, paper trading the bot for at least two months is a prudent way to lower your risk. That's why choosing a bot platform with backtesting and paper trading features is essential.

Final thoughts: Which one should you use?

Inexperienced traders are often drawn to crypto trading bots because they promise easy money with little effort. Crypto trading bots are becoming increasingly popular, and many traders enjoy the benefits. However, bots aren't magic; they're just tools. They should not be regarded as a substitute for your judgment skills or a replacement for gaining market expertise and knowledge.

Crypto trading bots are only as good as the strategies they are based on. If the strategy is wrong, the bot will inevitably lose money. Furthermore, crypto trading bots must be constantly monitored and tweaked as the market conditions change. If the bot is not monitored, it can make trades that lose money.

If you are a beginner trader, I recommend starting with the lowest-risk strategies: Wide range grid bots and periodic bots. As you build experience and knowledge, you can start venturing into other systems.

If you are good with technical analysis and have manual trading experience, you should try a Signal bot and configure it to suit your trading style.

Finally, if you are an investor looking for HODL, the periodic bot is the best for you.