What Is a Cryptocurrency Exchange Bot?

CIOReviewIndia Team | Tuesday, 17 March 2020, 04:53 IST

What Is a Cryptocurrency Exchange Bot?Cryptocurrency exchange bots are software programs designed to manage your cryptocurrency operations. These algorithmic exchange programs interact directly with cryptocurrency exchanges to interpret market information and then place buy or sell orders for you.

There are a number of ways you can use a Trading App to execute your trade operations. There are third-party bots that can be granted to users in exchange for a fee, as well as bots that can be accessed for free through open source platforms. If you have the technical knowledge, you also have the option to create your own bot.

How do they work?

Most cryptocurrency exchanges allow you to interact with their platforms through an application programming interface, or API. Basically, it is an interface that allows you to send and receive specific types of information to and from the exchange - in this case, a bot can receive information about the platform's prices and market, and place purchase and sale orders.

Designed to automate your cryptocurrency operations, bots monitor price movements and market trends based on a set of parameters pre-programmed by you. They can analyze data such as price, trading volume, and a range of technical indicators across multiple exchanges to determine when to place orders based on your pre-defined exchange strategy.

For example, you could program a bot to buy Bitcoin Cash when its price drops to a specific point, or sell when the price reaches the level you want. Once the desired price is available, the bot executes the trade for you automatically. Most bots are quite customizable and can be programmed according to your preferred exchange strategy.

What benefits do cryptocurrency exchange bots offer?

Why might cryptocurrency exchange bots be useful to you? Depending on the type of user you are, bots can offer different advantages:

  • 24/7 exchanges. Unlike stock exchanges that have regular trading hours, global cryptocurrency markets are available 24/7. Of course, being aware of market movements at all hours of the day and night is simply impossible for a human being, so using a bot allows you to take advantage of opportunities that you might otherwise miss.
  • Fast execution. Market changes occur rapidly in the world of digital currencies. Bots are able to process market information and act on it much faster than the average user, giving you the ability to respond quickly to opportunities as they arise.
  • Reduce human error. Entering transaction details manually always carries the risk of human error. By automating the execution of bot operations, this risk is reduced.
  • Eliminate the factor of emotions. Humans can let emotions intervene in their decision making and override their good judgment, which can sometimes make it difficult to follow a business strategy. Bots remove emotion from the equation, ensuring that exchanges take place only if certain parameters are met.
  • Ability to diversify. Using a bot allows you to trade multiple accounts and try different strategies. This could help you manage a wide variety of digital currencies.
  • Retrospective tests. Do you have an idea for a strategy but are not sure if it will work? You could use a bot for back testing, which is where you test your strategy using historical market data to determine if it might be a viable option. However, you should keep in mind that past performance is never a reliable indicator of future performance.

Tips on exchanging with bots

There are several measures you can take to avoid risks and inconveniences using exchange bots. Some of them are:

  • Don't allow your bot to make withdrawals. In most cases, there is no need to give your bot permission to withdraw funds from your account, so prohibiting access to withdrawals could be a simple way to protect your money. Of course, if you are executing arbitrage transactions between exchanges, you will need to guarantee access to withdrawals.
  • Don't share your secret API. In order for your bot to work, you will need to create a secret API key in the cryptocurrency exchange you have chosen. Secret APIs are like cryptocurrency wallets for private keys. If someone else had your secret API key, that person could make transactions from your account; so you should never share it with anyone.
  • Use 2-factor authentication. Enabling 2-factor authentication on all exchanges, accounts, wallets, and cryptocurrency apps can provide an additional layer of protection for your funds. Also, it is essential to establish strong passwords.