Trading bots for bitcoin exchanges: the Holy Grail or a wild goose chase?


The majority of commercial transactions on financial markets through automated trading systems or, more simply, bots. According to ZeroHedge, the share of such transactions in the total volume of trading in the financial market is more than 80%.

Being in a legal vacuum, the cryptocurrency market is no exception — there’s also a thriving trading and forbidden in the traditional financial accounting manipulation. Moreover, we are the crypto currency exchange is often encouraged high-frequency trading, bringing on platform liquidity and, of course, a considerable fee income.

Many experts believe that the poorly regulated market of digital currencies is dominated by trading bots that affect trading volumes and pricing. The problem of market manipulation — the object of attention from regulators, including the Commission on securities and exchange Commission (SEC), which is rejecting applications to launch a bitcoin ETF prevents the development of cryptocurrency market institutional investors.

What is auto-trading and why trade bots?

Automated trading system (ATS) or a trading robot programs, which serve for complete or partial automation of trading. They use a special trading strategy in which the bots can open and close positions within a fraction of a second.

ATS is often mistakenly equated with the term “algorithmic trading”. The fact that the latter does not aim to make a profit. Algorithmic trading is a method of execution of large applications, when it is divided into several sub-applications with special characteristics price and volume. Each of them is sent to the market for execution at a specific time. The algorithmic trading is intended to reduce the costs of implementation of a major application, to minimize the impact on the market and reduce the risk of failure of the transaction.

Another thing — trading robot whose sole purpose is to profit. These programs interact with the exchanges through the API, receiving and interpreting market information, put the appropriate orders to buy or sell.

Bots obey specified rules and algorithms. For example, the bot may take into account parameters such as market price, the volume available in the glass of orders, time, etc. they Also can account for the data of technical indicators for example exponential moving averages (EMA) or Bollinger bands, and various variables set by the user. In addition, bots can communicate with each other and various trading platforms (if we are talking about arbitration policies).

Bots trading allow the trader to withhold a significant portion of her time to analyze the market and price movements in various currency pairs. Bots have advantages over human beings, mainly due to their ability to carry out transactions in a fraction of seconds, 24/7. Unlike people, the programs devoid of emotion, unable to work with a large number of exchanges and currency pairs.

ATS used by professionals, including quite a large financial company, and “lovers” — a simple cryptocurrency owners seeking passive income and increase your capital. Note also that engaged in high frequency trading firms and individuals usually do not need a huge amount of capital and do not have to accumulate positions and hold them. In addition, a potential Sharpe ratio for high frequency trading may be significantly higher than for traditional strategies like Buy and Hold.

Progress is not in place, the algorithms become more complicated, and different bots are competing not only with people but also among themselves.

The bots and basic trading strategies

Shopping bots vary in complexity, the principles of the device and, of course, price. There are three main categories of such programs:

  • simple bots with pre-defined logic;
  • On the basis of artificial intelligence and machine learning (smart bots);
  • advisers.

Simple bots operate on the basis of ready-made scripts that guide in a given situation. Inherent in them algorithms, as a rule, you can edit, since hardly one day bots will provide stable income in the long term.

“Smart” robots. Decisions of this kind are usually capable of self-learning. Their basis may be neural networks and machine learning algorithms that increase the efficiency and depth of analysis. Those boots are usually more expensive and harder to use.

Robots advisors can relate to a first and second category. From the name itself it is clear that such decisions give recommendations, not make deals. Such programs are also frequently used in the context of trust management when transactions API controls the remote broker.

In automated trading is possible various strategies, including:

  • arbitrage earnings on the difference in price of digital coins on different exchanges (or between the underlying asset and its derivatives);
  • market-making — taking advantage of the difference between the prices of buying and selling coins, as well as their derivatives.

When cryptocurrency trading is still in its infancy, and the efficiency of the market was even weaker than now, a lot of traders have earned on the arbitrage. In other words, they bought the asset on one exchange and sold on another at a higher price, making a profit in the form of income from the difference minus commissions.

The fact that a few years ago, the market volume was significantly less than it is now. Traded not many people, there is less exchange and, accordingly, not so hard was competition between sites. All this was the cause of imbalances on different platforms from which you can benefit. With the development of infrastructure and increase in market price differentials were smoothed out, and gradually that occupation became less relevant.

Strategy market making involves speculative gain. In accordance with the price fluctuations of the trading bot is placing a limit order and a profit on the price difference of buying and selling. For providing liquidity, improving the quality and attractiveness of the trading platform, traders can receive bonuses in the form of lower commissions.

How effective is trading bots?

As mentioned above, arbitrage opportunities in cryptocurrency market are not so attractive. As for strategies, market making, many bots, for example, are guided by the EMA data and other lagging indicators. The values of such instruments of technical analysis based on past history, which is surely their fault. Thus, most systems automated trading carry out analysis only in retrospect.

In General, the technical analysis of cryptocurrencies, many have criticized, citing the key role of external, non-market factors. However, critics often overestimate his ability, forgetting that analysts ‘ assumptions are only probabilistic in nature. Technical analysis is only the assistant in decision-making and not a tool to get rich quick. In a not so liquid, volatile, subject to manipulation and sensitive to “loud” market news, it is difficult to predict anything in advance.

Do not forget that each market participant has its own risk appetite. The latter is a degree of readiness of the trader/investor to work with high-risk assets. This term is often interpreted as the degree of uncertainty, which can afford to the investor against possible adverse changes in the value of its portfolio of assets.

All this means that certain trading strategies are suitable for some traders, but completely unacceptable for others. In addition, well-performing boat will not necessarily show high performance in the future. Ignoring this fact can lead to so-called systematic error survivors.

Criticism and risks of automated trading

Many experts believe that high frequency trading creates excessively high load on the infrastructure of the financial market. Automated trading systems can have several requests per second for each tool, with only a small part of these orders result in trades. Thus, the exchange infrastructure is loaded, most of the time idling.

Also automated trading systems there are risks associated with software, hardware or human error. For example, ATS has played a significant role in short-term decline of the U.S. stock market in 2010, when high frequency liquidity providers abruptly stopped the operation. Then algorithmic and high frequency trading have become the subject of numerous proceedings initiated by the SEC and CFTC.

Another example is the so-called Knightmare on the new York stock exchange, which occurred on 1 August 2012. Then updated the algorithmic engine of Knight Capital Group due to errors in customizing for 45 minutes put on the purchase requisition up to $3.5 billion, and orders to sell at $3.15 million due to incorrect actions ON the market for some assets have moved by more than 10%. Net loss for Knight Capital $460 million the next day the company declared bankruptcy.

In 2012 the European Parliament discussed the introduction of significant restrictions or even a complete ban on high-frequency trading. Despite the many proposals in the EU and in the US, only a few countries have imposed legal restrictions on high-frequency trading.

One of the first was Italy, which, on 2 September 2013 imposed a tax directed against high-frequency traders. So, lasting less than half a second transaction were levied duty at the rate of 0.02%.

At the same time, many researchers believe that automated trading improves the liquidity of markets, and reduces trade costs.

ATS and manipulation

Recently Wall Street Journal published an article stating that the cryptocurrency market is dominated by trading bots, which are not much influenced by the pricing and trading volumes. At the same time, the extent of the problem grow, acquiring a global character.

In particular, the cryptocurrency market flourish techniques such unfair automated trading spoofing and bogus trades (wash trades). In the first case, bot zagromozhdaet fake orders, creating the illusion of a high market demand/supply, deceiving traders. Wash trades implies a situation, when the bot carries out transactions of purchase/sale with ourselves, creating the illusion of a flurry of activity, as well as artificially inflating trading volumes and asset prices.

Both types of operations are prohibited in traditional financial markets. For example, the new York stock exchange regularly monitors the correctness of trading transactions and punish offenders.

Some ardent opponents of regulation of the market of cryptocurrencies argue that the manipulation is not bad, and even openly support such actions.

For example, a trader Kjetil Eilersen believes that it makes no sense to regulators to prohibit market manipulation. Instead, it is better to provide small traders with advanced tools for market manipulation. According to Kjetil, this will somewhat equalize the capacities of the different participants.

“If you manipulate one, not manipulating anybody”, — he said.

There are bots whose purpose is the trading activity of large companies. So, managing partner of hedge Fund Capital Virgil Stefan Keane noted that his firm some had a lot of trouble a “bot-terrorist”, which Virgil has suffered losses on transactions with Ethereum.

As you know, the cryptocurrency market is still not so big and liquid. This means that even one bot can affect the whole market. In addition, bots often play a key role in the schemes of Pump&dump, prompting the crowd of inexperienced market participants to buy “I think”.

Manipulation in the cryptocurrency market has been increasingly in the field of view of regulators in different countries. So, last month the Prosecutor General’s office of the state of new York stated in its report on the vulnerability of bitcoin exchanges to market manipulation. The Agency also sent information about several exchanges to regulators in connection with the possible violation of the law.


Automatic systems are not affected by the emotional factor in trading, they are guided by a clearly defined computing and algorithms. ATS is able to detect trading signals in the background of market noise and process huge amounts of data, processing of which is not to handle for one person. When configured correctly, bots can bring passive income.

However, the cryptocurrency market, as well as any other, even emotionless, cold calculation is always fraught with risks that can be minimized but not completely eliminated.

Also, maybe bots are hardly necessary bitcoin maximalists and ardent supporters of the Buy & Hold strategies.

Shopping bots are not the “Holy Grail”, even the most effective ones require periodic revision of the parameters. In other words, it’s not “babble”, which once clicked, and constantly get the profit. If something is advertised bot, “bringing 100500% profit” is most likely a Scam.

Alexander Kondratyuk

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