AI and Automation: The Future of Crypto Trading?!

Tuesday, 14/12/2021 | 15:07 GMT by Trality
  • Learn how these technologies are redefining crypto trading
Bitcoin
FM

Crypto trading has become an industry worth over a hundred billion dollars, one that generates consistent returns despite the impact of external market factors such as the pandemic.

However, despite the undeniable popularity of crypto trading, investing in cryptocurrencies isn’t without its difficulties. Most people who’ve heard of cryptocurrencies, and even some of those who have already invested their money, only have a vague understanding of how cryptocurrencies work as investment vehicles.

Navigating crypto trading takes skill and know-how. Unlike conventional financial markets, crypto markets are open 24/7/365, so traders must constantly monitor charts in order to avoid missing out on a good chance to buy or sell.

Fortunately, there are tech tools available that can help both new and experienced traders understand the crypto market. In this article, we’re going to take a look at two such tools that are redefining crypto trading: artificial intelligence (AI ) and automated trading solutions (aka crypto trading bots).

How AI is helping crypto traders

Increasingly, AI tools are being used in the cryptosphere, creating interesting synergies with blockchain technology and helping to address many of the issues crypto traders typically have.

AI can take all of the historical data of a particular asset, such as its daily price over the course of a year or the number of the times it was mentioned on social networks, and use that information to make predictions regarding its potential future price trends.

Of course, the quality of the prediction depends on the quantity and quality of the data, the sophistication of the mathematical models used, and the amount of computational power dedicated to solving the problem.

Advantages of using AI

The main advantages of using AI for crypto trading include:

  • Analyze large amounts of data: AI has the power to sift through a large amount of blockchain data, which can include historical market data, articles, forums, and even social media comments. Investors can use data analytics to predict and forecast price-altering events in the market and make informed choices.
  • Learning ability: Sophisticated AI can use neural networks to make predictions about the dynamics of the crypto market. AI systems can monitor and compare exchange rate fluctuations as well as detect patterns and use that information to make educated predictions for changes to be made the next day.
  • Accuracy: If fed enough quality data, AI systems can have a high degree of accuracy. For example, the NeuroBot platform claims to have an AI system that can predict the crypto market with an accuracy of up to 90%.
  • Market sentiment analysis: Sentiment analysis involves using AI to analyze the sentiments or opinions people have about a certain topic. Tools can analyze different signals to determine whether the sentiments for a particular currency are positive, negative, or neutral. In crypto investing, an overall positive sentiment for an asset can predict that its price will go up, and vice versa.

The use of AI for crypto trading is not widespread, but there are projects that are working to implement the technology in the blockchain space. The implementation of AI, however, has been particularly successful in conventional markets. There are currently billions of dollars worth of traditional stocks, bonds, and assets that are being managed using AI tools.

Downsides of using AI

Like most nascent technologies, AI can be a double-edged sword. Here are some of the downsides of using AI for trading:


  • Overfitting: In machine learning, overfitting refers to statistical models with more data than is required. Trading algorithms can sometimes be fed too much historical information. That’s not exactly a bad thing, but it can lead to inflexibility of trading strategies and impact the performance. It can also create bias for positive outcomes and give the false impression that a particular strategy will perform as predicted in a live market.
  • Underfitting: This is the opposite of overfitting. It refers to statistical models with too little data. Lack of enough quality data can hinder the performance and accuracy of a machine learning model and lead to an abundance of false predictions.
  • Overdependence: No matter how intelligent and sophisticated an AI tool might be, it can never be completely foolproof. Even trusted algorithms can experience failure. Trading occurs in a fast-paced environment, and mistakes are eventually bound to happen.

Using trading bots for crypto trading

Trading bots are computer programs with preset variables that are used to automate trading on crypto exchanges. They use algorithms to conduct trades on behalf of investors based on custom playbooks that specify the rules for entering and exiting trades.

Bots can be programmed to recognize candlestick and chart patterns, trend reversal points, and directions of quotations that can sometimes be invisible to the trader. As a result, the trader doesn’t need to incessantly monitor the crypto market and constantly calculate the best time to open or close positions.

Trading bots typically have user fees as well as requirements in terms of software and hardware. They use API (Application Program Interface) keys to connect to crypto exchanges and gather the information necessary for executing buy and sell orders. So in order to utilize your bot for Binance, for example, you would require the official Binance API.

You have to set up proper accounts across different exchanges for bots to work. You must also fund your exchange accounts with crypto assets. In many cases, you still have to make investment decisions such as when to buy or sell. A bot won’t be successful unless you put in the necessary time and effort to tweak its strategy.

A fine-tuned trading bot can analyze market charts, make efficient trades, and determine the best entry points. They also have the added advantage of eliminating FOMO and emotions when making trading decisions.

Types of bots

There are a variety of cryptocurrency bots available for users to use. These include:


  • Arbitrage bots: This bot examines the price of an asset across several exchanges and takes advantage of discrepancies. Since the price of currencies tends to vary from exchange to exchange, arbitrage bots that can move fast enough can exploit exchanges that delay updating their prices.
  • Trend trading bots: These are bots that track the momentum of a particular asset, analyze it for trends, and then execute buy or sell orders. For example, if the trend shows an upsurge in price, then the bot will enter a long position. If the price drops, then it’ll take a short position.
  • Market-making bots: A market maker bot analyzes the order book and places orders outside the spread in an attempt to buy and sell with a profit. The goal of market making is to sell an asset at a higher value than the buying price and to do it as often as possible.
  • Coin-lending bots: A lucrative way to turn a profit from cryptocurrencies is to lend coins to margin traders who will pay the loan back with interest. Some crypto exchanges like Poloniex and Bitfinex have a margin funding option, but manually setting parameters every time a margin trader pays you back and setting interest rates can get tedious. Coin-lending bots automate the process.

Advantages of using auto trading bots

Using crypto trading bots has a lot of advantages. Below are some examples:


  • Round-the-clock trading: Unlike humans, bots don’t need to sleep or eat. You can depend on your bot to make trades at any time of the day, 24/7, 365 days a year.
  • Emotionless trading: Bots aren’t swayed by emotions and won’t open or close positions based on sudden market swings. They’re ideal for traders who want to strictly adhere to a particular strategy. It’s no secret that many novice traders lose their investment capital because of irrational decisions caused by emotional states.
  • Backtesting strategies or paper trading: Bots are great for backtesting trading strategies by using historical data to create simulations that test the viability of a particular strategy or pricing model. With good quality data and a backtesting bot, you can try out different strategies before you put your hard-earned money on the line.
  • Diversification and risk-sharing: Trading bots are great at minimizing risk by not putting all of your eggs in one basket. Cryptocurrency markets can be highly volatile, which is why it is prudent to diversify your risk by running multiple trading bots. Diversifying your portfolio isn’t foolproof, but it can balance risk and reward by reducing your exposure to any one particular asset.
  • Lightning speed: Bots are considerably faster than humans at initiating trades. They are capable of performing millions of computations across several markets almost instantly. What would normally take you minutes to accomplish can now be completed by a trading bot in a fraction of a second.

Disadvantages of using crypto trading bots

Before you start using a crypto trading bot, consider the following downsides:


  • Marginal returns: Even when a crypto trading bot is operating correctly, most of them only provide marginal returns. Using bots can give you a decent passive income, but it’s not a get-rich-quick scheme that’ll get you a Lambo overnight.
  • Poor design: Most bots, especially free ones, are not well designed. You may need to pay fees to get quality bots or code your own sophisticated bots using custom or pre-existing packages.
  • Lack of knowledge: Successfully using a bot requires at least a rudimentary knowledge of a digital currency market and a good supporting investment plan. For veteran traders, a bot is a useful tool for implementing tried-and-tested crypto trading strategies. For beginners, some time and effort may be needed to properly use a bot.

Note: Be careful who you trust with your exchange account API keys. The key gives a third party permission to use your exchange account, including making trades and withdrawals. Trading bots require exchange API keys to work; however, you should only give your key to a trusted service with a good reputation to avoid getting scammed.

Combining AI with crypto trading bots

Crypto trading bots typically require manual setup by the trader. While you can use conventional trading strategies, the burden and risk of coming up with a profitable setup fall on the trader. That’s why the majority of traders have a hard time finding a good long-term strategy without losing some money first.

By combining AI with trading bots, traders can enjoy a higher level of performance without having to study and try different parameters and strategies. The AI bot can perform big data analysis and use adaptive algorithms to automate investments and maximize profits during trading. Mixing AI and trading bots is a new concept in the crypto space, but there are already a number of companies that offer AI-optimized trading bots.

Final thoughts

Crypto trading is the fastest developing sector of the entire crypto market, and using technology to automate the process is popular among crypto traders and enthusiasts. Both new traders and veterans can make use of AI and crypto trading bots to perform technical and fundamental analyses and profitably trade assets on crypto exchanges.

The use of technology is making the arena much more sophisticated and dynamic than it was five years ago when simple HODL strategies were king. Hands-off automation is quickly taking over every aspect of crypto trading. With such a high adoption rate in trading, automation is here to stay.

Crypto trading has become an industry worth over a hundred billion dollars, one that generates consistent returns despite the impact of external market factors such as the pandemic.

However, despite the undeniable popularity of crypto trading, investing in cryptocurrencies isn’t without its difficulties. Most people who’ve heard of cryptocurrencies, and even some of those who have already invested their money, only have a vague understanding of how cryptocurrencies work as investment vehicles.

Navigating crypto trading takes skill and know-how. Unlike conventional financial markets, crypto markets are open 24/7/365, so traders must constantly monitor charts in order to avoid missing out on a good chance to buy or sell.

Fortunately, there are tech tools available that can help both new and experienced traders understand the crypto market. In this article, we’re going to take a look at two such tools that are redefining crypto trading: artificial intelligence (AI ) and automated trading solutions (aka crypto trading bots).

How AI is helping crypto traders

Increasingly, AI tools are being used in the cryptosphere, creating interesting synergies with blockchain technology and helping to address many of the issues crypto traders typically have.

AI can take all of the historical data of a particular asset, such as its daily price over the course of a year or the number of the times it was mentioned on social networks, and use that information to make predictions regarding its potential future price trends.

Of course, the quality of the prediction depends on the quantity and quality of the data, the sophistication of the mathematical models used, and the amount of computational power dedicated to solving the problem.

Advantages of using AI

The main advantages of using AI for crypto trading include:

  • Analyze large amounts of data: AI has the power to sift through a large amount of blockchain data, which can include historical market data, articles, forums, and even social media comments. Investors can use data analytics to predict and forecast price-altering events in the market and make informed choices.
  • Learning ability: Sophisticated AI can use neural networks to make predictions about the dynamics of the crypto market. AI systems can monitor and compare exchange rate fluctuations as well as detect patterns and use that information to make educated predictions for changes to be made the next day.
  • Accuracy: If fed enough quality data, AI systems can have a high degree of accuracy. For example, the NeuroBot platform claims to have an AI system that can predict the crypto market with an accuracy of up to 90%.
  • Market sentiment analysis: Sentiment analysis involves using AI to analyze the sentiments or opinions people have about a certain topic. Tools can analyze different signals to determine whether the sentiments for a particular currency are positive, negative, or neutral. In crypto investing, an overall positive sentiment for an asset can predict that its price will go up, and vice versa.

The use of AI for crypto trading is not widespread, but there are projects that are working to implement the technology in the blockchain space. The implementation of AI, however, has been particularly successful in conventional markets. There are currently billions of dollars worth of traditional stocks, bonds, and assets that are being managed using AI tools.

Downsides of using AI

Like most nascent technologies, AI can be a double-edged sword. Here are some of the downsides of using AI for trading:


  • Overfitting: In machine learning, overfitting refers to statistical models with more data than is required. Trading algorithms can sometimes be fed too much historical information. That’s not exactly a bad thing, but it can lead to inflexibility of trading strategies and impact the performance. It can also create bias for positive outcomes and give the false impression that a particular strategy will perform as predicted in a live market.
  • Underfitting: This is the opposite of overfitting. It refers to statistical models with too little data. Lack of enough quality data can hinder the performance and accuracy of a machine learning model and lead to an abundance of false predictions.
  • Overdependence: No matter how intelligent and sophisticated an AI tool might be, it can never be completely foolproof. Even trusted algorithms can experience failure. Trading occurs in a fast-paced environment, and mistakes are eventually bound to happen.

Using trading bots for crypto trading

Trading bots are computer programs with preset variables that are used to automate trading on crypto exchanges. They use algorithms to conduct trades on behalf of investors based on custom playbooks that specify the rules for entering and exiting trades.

Bots can be programmed to recognize candlestick and chart patterns, trend reversal points, and directions of quotations that can sometimes be invisible to the trader. As a result, the trader doesn’t need to incessantly monitor the crypto market and constantly calculate the best time to open or close positions.

Trading bots typically have user fees as well as requirements in terms of software and hardware. They use API (Application Program Interface) keys to connect to crypto exchanges and gather the information necessary for executing buy and sell orders. So in order to utilize your bot for Binance, for example, you would require the official Binance API.

You have to set up proper accounts across different exchanges for bots to work. You must also fund your exchange accounts with crypto assets. In many cases, you still have to make investment decisions such as when to buy or sell. A bot won’t be successful unless you put in the necessary time and effort to tweak its strategy.

A fine-tuned trading bot can analyze market charts, make efficient trades, and determine the best entry points. They also have the added advantage of eliminating FOMO and emotions when making trading decisions.

Types of bots

There are a variety of cryptocurrency bots available for users to use. These include:


  • Arbitrage bots: This bot examines the price of an asset across several exchanges and takes advantage of discrepancies. Since the price of currencies tends to vary from exchange to exchange, arbitrage bots that can move fast enough can exploit exchanges that delay updating their prices.
  • Trend trading bots: These are bots that track the momentum of a particular asset, analyze it for trends, and then execute buy or sell orders. For example, if the trend shows an upsurge in price, then the bot will enter a long position. If the price drops, then it’ll take a short position.
  • Market-making bots: A market maker bot analyzes the order book and places orders outside the spread in an attempt to buy and sell with a profit. The goal of market making is to sell an asset at a higher value than the buying price and to do it as often as possible.
  • Coin-lending bots: A lucrative way to turn a profit from cryptocurrencies is to lend coins to margin traders who will pay the loan back with interest. Some crypto exchanges like Poloniex and Bitfinex have a margin funding option, but manually setting parameters every time a margin trader pays you back and setting interest rates can get tedious. Coin-lending bots automate the process.

Advantages of using auto trading bots

Using crypto trading bots has a lot of advantages. Below are some examples:


  • Round-the-clock trading: Unlike humans, bots don’t need to sleep or eat. You can depend on your bot to make trades at any time of the day, 24/7, 365 days a year.
  • Emotionless trading: Bots aren’t swayed by emotions and won’t open or close positions based on sudden market swings. They’re ideal for traders who want to strictly adhere to a particular strategy. It’s no secret that many novice traders lose their investment capital because of irrational decisions caused by emotional states.
  • Backtesting strategies or paper trading: Bots are great for backtesting trading strategies by using historical data to create simulations that test the viability of a particular strategy or pricing model. With good quality data and a backtesting bot, you can try out different strategies before you put your hard-earned money on the line.
  • Diversification and risk-sharing: Trading bots are great at minimizing risk by not putting all of your eggs in one basket. Cryptocurrency markets can be highly volatile, which is why it is prudent to diversify your risk by running multiple trading bots. Diversifying your portfolio isn’t foolproof, but it can balance risk and reward by reducing your exposure to any one particular asset.
  • Lightning speed: Bots are considerably faster than humans at initiating trades. They are capable of performing millions of computations across several markets almost instantly. What would normally take you minutes to accomplish can now be completed by a trading bot in a fraction of a second.

Disadvantages of using crypto trading bots

Before you start using a crypto trading bot, consider the following downsides:


  • Marginal returns: Even when a crypto trading bot is operating correctly, most of them only provide marginal returns. Using bots can give you a decent passive income, but it’s not a get-rich-quick scheme that’ll get you a Lambo overnight.
  • Poor design: Most bots, especially free ones, are not well designed. You may need to pay fees to get quality bots or code your own sophisticated bots using custom or pre-existing packages.
  • Lack of knowledge: Successfully using a bot requires at least a rudimentary knowledge of a digital currency market and a good supporting investment plan. For veteran traders, a bot is a useful tool for implementing tried-and-tested crypto trading strategies. For beginners, some time and effort may be needed to properly use a bot.

Note: Be careful who you trust with your exchange account API keys. The key gives a third party permission to use your exchange account, including making trades and withdrawals. Trading bots require exchange API keys to work; however, you should only give your key to a trusted service with a good reputation to avoid getting scammed.

Combining AI with crypto trading bots

Crypto trading bots typically require manual setup by the trader. While you can use conventional trading strategies, the burden and risk of coming up with a profitable setup fall on the trader. That’s why the majority of traders have a hard time finding a good long-term strategy without losing some money first.

By combining AI with trading bots, traders can enjoy a higher level of performance without having to study and try different parameters and strategies. The AI bot can perform big data analysis and use adaptive algorithms to automate investments and maximize profits during trading. Mixing AI and trading bots is a new concept in the crypto space, but there are already a number of companies that offer AI-optimized trading bots.

Final thoughts

Crypto trading is the fastest developing sector of the entire crypto market, and using technology to automate the process is popular among crypto traders and enthusiasts. Both new traders and veterans can make use of AI and crypto trading bots to perform technical and fundamental analyses and profitably trade assets on crypto exchanges.

The use of technology is making the arena much more sophisticated and dynamic than it was five years ago when simple HODL strategies were king. Hands-off automation is quickly taking over every aspect of crypto trading. With such a high adoption rate in trading, automation is here to stay.

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