In this article, we discuss 5 good reasons to use trading bots to automate your crypto trading strategy – at the end we’ll share unexpected disadvantages you should be aware of.
Automated trading bots like 3commas
and copy trading platforms like BitGet
have become an increasingly popular tool among cryptocurrency traders looking to automate and optimize their trading strategies.
These software programs are designed to execute trades on behalf of the trader, using algorithms and technical indicators to make decisions based on the trading signal definitions.
Why automate your crypto trading strategy?
- Time-saving: The first principle of wealth building is that your money should be working for you while you do other things. One of the biggest advantages of using trading bots is that they do the unending menial task of watching prices for you. If you find yourself watching the charts or constantly checking the markets to manually execute trades, consider learning how to set up a bot to make trades on your behalf – or find some proven copy trading profiles and follow their automations.
- 24/7 trading: Crypto markets never sleep and using a trading bot allows you to assign your money the task of monitoring price and executing trades even when you are not available. This can be especially useful for investors who want to trade a slow long term, trend following approach.
- Diversification: A series of crypto trading bots across a portfolio of digital assets makes it easy to diversify into a new crypto portfolio at the start of the next Altcoin Season – and also to manage the work of closing trades at the right time. We have set up our trading bots to follow the proven Crypto SmartWatch strategy for different portfolios of coins. By diversifying your portfolio with a small position in many coins, you can spread exposure across different assets, thus increasing the potential for a single investment with massive moves boost your overall returns.
- Backtesting: Another advantage of using trading bots is the ability to backtest different strategies. Our methodical backtesting allows better confidence to identify when Altcoin Season is starting and ending, helping us fine-tune the settings and timing of the trading bot operations. Our Crypto SmartWatch historical research is now invaluable for crypto traders to optimize their trading strategies in 2023. Improve your understanding of risk control in trading crypto currency trends before you start trading with a bot.
- Emotionless trading: One of the most common mistakes made by traders is allowing emotions to cloud their judgment. This can cause trading mistakes when we are winning and trading mistakes when we are losing. A well-planned trading bot can eliminate this problem as trades are executed based on pre-set rules and algorithms rather than emotions, opinion or second-guessing. A Botted strategy will remove emotions such as fear, greed and excitement, which can often lead to impulsive trading and higher risk.
Our research has shown that trading bots can provide advantages when you correctly automate your crypto trading.
Trading Bots can be especially useful for investors who wisely take a hands-off approach to trading. Experienced investors leave their money to manage the work involved in watching the markets to capture opportunity at the correct time.
However, it is important to note that like any trading strategy, using a trading bot comes with its own set of risks.
Disadvantages Of Using A Bot To Trade
While trading bot services and the best copy trading platforms offer a range of options and tools, they also come with some disadvantages to be considered. Some of the downsides of using copy trading or following trading bot include:
- Lack of flexibility: Trading bots rely on pre-set rules and algorithms to make trades. This can be beneficial in some cases, but it also means that the bot is not able to adapt to changes in the market or unexpected events. (For example we know that our trend following strategy, the Crypto SmartWatch, will take repeated losses in a sideways market so we have manual review of the activity of all our our bots.)
- Lack of human judgement: Trading bots can also lack human judgement, as they make trades based on pre-set rules and algorithms. We must understand all of the conditions of the market and how our bot will respond so that we might pause the bot operation in some market conditions.
- Risk of hacking: Trading bots are operated through software, which means they are vulnerable to hacking attempts. This will always put your funds and investment at risk, so we recommend funding your trading exchange with only a small part of your overall cold storage assets. Always take the time to set up 2FA and strong random passwords on your exchange accounts. Keep your cold storage digital assets on a hardware wallet.
- High costs: You may think that many of the best trading bots on the market come with a high cost but you can select from a range of low price and high return bots to follow on 3commas or BitGet.
- Lack of transparency: Most trading bots operate in a ‘black box’ with complex sounding things going on behind the scenes, which can make it difficult for traders to know exactly what trades the bot is making and why. The Crypto SmartWatch approach is completely transparent and easy to understand. We can explain why every trade is placed!
Are Trading Bots Even LEGAL?
It’s important to also note that depending on the jurisdiction you’re trading in, there might be some legal and regulatory restrictions around the use of trading bots. It’s important to be familiar with these before using bots, to ensure compliance with regulations.
Trading Bots and Your Tax Obligations
Using a trading bot will not change your tax classification. The classification of your trades and investment activity for tax purposes will be determined by
- how often you trade and
- the amount of profits you earn.
Large crypto profits will affect the tax bracket you fall under and thus change your tax obligation.
It’s also important to note that, depending on the jurisdiction and the way you use it, the use of a trading bot could change the way your profits are classified by the tax authorities.
Beware Of Day Trading Bots
For example, if a day trading bot is used for scalping, it may be classified as a business activity and may be subject to different tax rates and regulations than if it were used for long-term buy-and-hold investments.
It is always recommended to consult with a tax professional in your country to understand the tax implications of your crypto trading activity and how the use of a trading bot may affect it.
Keep Trading Records The Easy Way
It is also important to keep accurate records of all your trades and report them correctly on your tax return in order to avoid any issues with the tax authorities.
It’s good practice to keep track of all your crypto transactions and keep records of buying, selling and trading of any cryptocurrency, this would help in determining the capital gain/loss on them, as well as the cost basis. Simply import your trade data from your exchange API and CoinTracking.co will calculate the rest.
Crypto trading is subject to tax regulations in most countries, so it’s essential to comply with them to avoid any legal issues.
Automate Your Crypto Trading
Overall, while trading bots can offer a range of benefits to traders, they also come with a number of disadvantages and dangers. Get to know exactly how your bot will work before deciding to automate your crypto trading with a bot.
Crypto Investors should consider their own unique needs and risk tolerance when deciding whether to use a trading bot. Additionally, it is important to always do your own research, and thoroughly test and evaluate any trading bot before using it with your own funds.