Intellectsoft is a boutique digital transformation consultancy headquartered in Palo Alto.
Post by Tim Kozak, Head of Technology at Intellectsoft Blockchain Lab
Being an investor or a trader requires constant learning and improvement. Such notion is also valid for the cryptocurrency markets. Automation of the processes is a common occurrence in the 21st century. It provides an immediate advantage to the party implementing the innovative approach. Trading bots have become such an approach in the cryptocurrency markets, especially following a significant exodus of technological infrastructure from the traditional FOREX markets into cryptocurrency exchanges. In addition, their interaction with the Initial Exchange Offerings (IEOs) reflects their future potential for the traders.
Trading bot is a software program interacting directly with the software of exchanges through a dedicated protocol. It commonly uses the application programming interfaces (APIs) for obtaining and submitting the essential information. Trading bots make their decisions through monitoring of the market price movements, while acting based on preprogrammed set of rules. The main input data analyzed by the bot includes prices, volume, orders, and timing.
Why using trading bots at all? One of the major reasons is a 24/7 market presence to ensure liquidity. Also, if one is looking to execute complex or more profitable orders, they require a specialized and automated software.
However, trading bots remain particularly expensive in the traditional financial markets. For instance, Bloomberg Terminal, partially acting as a trading bot, may cost at least $10 000. However, there are alternatives that also fit well a new market reality.
The initial use of the trading bots in the cryptocurrency markets focused on the night-time periods. Because of the 24/7 trading in the cryptocurrency markets, traders could be facing losses on their portfolios during the periods of rest and absence. The bots were acting as the safeguards during these periods to prevent major losses on the account.
Arbitrage opportunities in the cryptocurrency markets during the early days have broadened strategies using bots. The differences in asset prices between the markets allows to purchase them cheaper and resell at a profit. The evolution of the markets has narrowed such opportunities, but they still exist. In addition, the speed of assessment and execution by the trading bots allowed to utilize these opportunities.
Market making is an advanced strategy involving trading bots. It captures the spread between the bid and the ask prices on various derivative contracts. The bots act on the differences by ensuring return for the trader.
Trading bots benefit the traders during the IEOs by using arbitrage and market making strategies. In addition, bots may help with purchasing the needed amount of tokens in the shortest time possible. Given the following price increase, trading bots effectively guarantee returns for the holders of the tokens immediately following an IEO. At the same time, it is vital to underline the negative role of the bots during the recent IEOs.
For instance, the KuCoin IEO sold out in under 5 seconds following its launch. At the same time, the customers had to fill in their password and pin details, complete captcha, and enter the desired order amount before the completion of the purchase. Therefore, trading bots guaranteed faster purchase of tokens. The CEO of KuCoin, Michael Gan, has addressed the issue promising serious actions for those using trading bots. However, the actions of the traders using bots could be unethical, but definitely not illegal. The traders programmed the bots to utilize client-side code and layout of the website, allowing rendering the buy menu prematurely and filling it out.
IEO participants will take into consideration the abilities of the trading bots, potentially limiting their capabilities. At this point, they provide clear benefits to their users. The trading bots will remain popular as long as their benefits outweigh the costs. Do you want to build a cutting-edge trading bot and stay ahead of the herd? Contact us now.