How does robot trading help boost high-speed Bitcoin transactions?

Investors have been able to benefit from algorithmic ('algo') trading programs in many different contexts, but these 'trading bots' are of particular value to those interested in cryptocurrencies.

Bot trading can reduce user errors, process information more quickly, and give traders more time and flexibility. However, due to its immutable nature, it may have greater development potential in the crypto market.

Trading robots have been around for decades and have been increasingly used in the stock market as digitization has intensified. However, the cryptocurrency market is less than a decade old and much smaller than many more mature markets, so it has obviously had less time to integrate algorithmic trading.

Tim Enneking, chairman of cryptocurrency investment management firm EAM, highlighted the differences between high-frequency trading (HFT) in traditional markets and cryptocurrency trading.

He told CoinDesk:

“When it comes to equity HFT, milliseconds and microseconds matter. However, with cryptocurrencies, these very small time increments are not that important at all.”

By utilizing algorithmic trading, investors have access to a wide range of trading strategies. For example, HFT requires the use of software because it involves very rapid trading.

Arbitrage Trading

Another strategy that traders can use with trading bots is arbitrage – buying an asset in one market and selling it in another at a higher price to pocket the difference.

Petar Zivkovski, director of operations at leveraged Bitcoin trading platform Whaleclub, said:

“Generally speaking, bot trading can be profitable for a short period of time if insightful arbitrage is performed.”

In addition, there is more than one form of arbitrage, said Arthur Hayes, co-founder and CEO of leveraged bitcoin trading platform BitMEX. He elaborated on several other methods.

Hayes noted that traders can profit from strategies with futures contracts. For example, they can benefit from the difference between a futures contract and its underlying asset, a method known as futures arbitrage.

Investors can profit from price differences between futures contracts based on the same asset but traded on different exchanges.

Market Making

Another strategy that investors can use through trading robots is market making.

Hayes described this approach as ‘providing continuous bid and ask prices for a variety of spot digital currencies and digital currency derivative contracts’ in order to ‘capture the spread between bid and ask prices’.

Zivkovski said the practice involves "placing limit orders, generally at close to current market prices," meaning buy and sell orders. Over time, as prices fluctuate, the trader's algorithmic program automatically and continuously places orders, and he or she profits from the difference.

However, he added a warning that intense competition surrounding the practice could make the strategy unprofitable, 'especially in a low liquidity environment'.

getting Started

Fortunately, anyone can participate in bot trading. Traders can use ready-made solutions, although relying on pre-made software programs is dangerous. Algorithmic trader Jacob Eliosoff noted,

"Any machine that you can make money on just by buying it and turning it on will quickly be bought by a lot of other people, and your profit will be decimated. Even the initial profit is illusory."

Zivkovski said those new to bot trading might want to learn programming or find an open source bot that they can configure based on their views of the market.

Hayes offered slightly more technical advice, stressing the critical importance of risk management and error handling.

“There is no standard API for cryptocurrency exchanges, and some exchanges have better APIs than others. This means that a lot of time and effort needs to be spent on ensuring that the trading logic can handle outages and correctly calculate portfolio risk metrics.”

Enneking said that once a trader has developed and implemented his solution, it needs to be constantly revised. He added:

“Algorithmic trading is not a self-guided missile. You can’t let it run on its own over an extended period.”