Today’s trading activity in cryptocurrencies is eerily similar to the internet bubble of the late 90s. For those of you too young to remember, you essentially could buy a stock on the open and watch it shoot up 25% or more. You could do this over and over again, hence the birth of thousands of day traders looking to take their chances at trading. Now flashforward nearly 20 years and there is a fresh crop of 20 somethings looking to make it big in the next craze – cryptocurrencies. To this point, there are a number of cryptocurrency trading bots popping up which provide an automated method of gaining access to this market. Well, in this post I’m going to describe 4 reasons you will want to avoid these online slot machines.
List of Crypto Trading Bots
You know something is reaching a tipping point when you can find a list of open source bots that all claim to have an answer on how to trade the volatile world of crypto.
Literally named after Gordon Gekko from the cult classic Wall Street. This is an open source bot that supports over 25 exchanges.
Cryptohopperhas a standard SaaS feel to it with a pricing page and is cloud-based. You can gain access to the software for a measly $19 dollars a month.
Cryptotrader allows you to build your own cloud-based trading system with a few clicks of the mouse.
Since this is not a day trading bot review article, here are a few more floating in the ecosystem:
4 Ways Things Can Go Wrong
Each one of these crypto trading apps claims to provide you with flawless execution and 24/7 trades – even if your computer is off. What is there not to like? Well, let’s see where things can go wrong.
#1 – Bot Availability
So, what happens when the service goes down? Anyone involved with technology understands that uptime is relative. For some services, uptime is 99.99% while for others uptime is whenever they tell you the service is available. Now let’s create a real-life scenario to better explain how vulnerable you are to a trading bot that goes down. Let’s say your bot opened a short position in the middle of the night and goes offline shortly after placing the trade. So, while you were sleepingBitcoin makes a move of over 7% against you in a matter of hours. Sounds unrealistic right? Well, look at the below price activity for Bitcoin futures where this scenario actually occurred. Kind of scary right?
In the performance reports for each advertised bot, you will see a list of trades executed by the algo. You will probably see profit after profit as if the bot can do no wrong. Most bots will likely try to capture scalp trades where the system hopes to make small profits on a large number of trades. However, slippage may have another idea. Meaning the price the system displays in a backtest is likely not the price you will fill in the actual market. Once you factor in these slight differences in where you trade will actually execute, your profit target per trade will decrease. Take this reduction in profit over hundreds of trades and your killer system may begin to look mediocre.
#3 Fire and Forget- Unlikely
So, each bot will claim to have AI that may fine-tune your already awesome system to account for changes in the market. The funny thing about the crypto market is that the moves are unprecedented, even for Bitcoin.
While the AI may account for prior moves, how can it possibly account for price levels that have never been reached? Therefore, you will need to login to your bot of choice and make configuration changes to account for market conditions. This can prove tricky because once you tune the system, your pass trade data is essentially useless.
#4 Bots are Open to Fraud
You will hear about fears of fake bots popping up that will scam you out of your money. While this is a risk, with the flow of information on the web now, this likelihood of happening is less likely. What you really need to worry about is how your smart crypto trading app can be scammed. That’s right, not you, but your bot is the one you should be worried about. Let me take you back to the flash crash of 2010. On May 6, 2010, the market collapsed over 9% due to high-frequency trading algorithms all tripping over themselves to sell out of positions. What started all of this? Some complex supercomputer from the NSA? Nope. It was one guy trading from his house in London that managed to profit over $40 million dollars (source Forbes.com).
How to Prevent This from Happening
I am not one of these antiquated guys looking to trash the idea of automated trading. However, if you think you can pay $19 dollars a month to make extra income, you are surely delusional. Anything worth having in this world takes hard work – trading is no different. To this point, here are a few simple steps you can take to protect your capital if you are going to use automated trading systems.
Only run your trading bot during hours where you can actively monitor the trades. I love the idea of making money while you sleep, but at what risk?
Use a small amount of money when testing out the bot. If your bot cannot make money with a small amount of money, there is no need to back up the truck and unload all your cash.
Practice trading Bitcoin futures yourself on a market replay tool like Tradingsim. The best way you can learn how to configure your bot is to better understand how the crypto market trades.
Consider alternative investment options for getting into the crypto market. For example, you could invest in blockchain ETFs, or taking a longer timeframe for investing in Bitcoin.