How to Build a Crypto Trading Bot
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Since the beginning of the cryptocurrency boom that started in early 2017, people all around the world have been clamoring to trade in bitcoin and other altcoins. The problem with any commodity in the global marketplace is traders cannot be at their station 24 hours a day, 7 days a week.
Apple co-founder and tech guru Steve Wozniak recently admitted that he had sold his entire holdings of bitcoin because he had grown tired of constantly looking to see what the price was. Even the most dedicated trader will not want to spend their entire life staring at cryptocurrency price charts either.
Trading in cryptocurrencies is particularly addictive because the market is highly volatile. Bitcoin prices can and have dropped by as much as 25% in a day. While investors who are in for the long term might not worry about taking advantage of such fluctuations, cryptocurrency traders can make huge amounts of money from such volatility.
The solution to this problem is the trading bot. Such bots have been used by companies to set buy/sell commodities on global stock exchanges for decades. Trading bots help to automate the process and thereby relieving pressure on companies and traders.
Trading bots are software programs that use API’s to interact with financial exchanges. They actively monitor exchanges around the clock and will react in accordance to whatever predetermined criteria they have been programmed with.
How do crypto bots work?
To give a basic example, if a trading bot has been told to buy a commodity once the price hits $1 or lower, and sell once it hits $2, it will act in accordance with these limits, hopefully making a profit.
A cryptocurrency trading bot operates on these exact principles to facilitate the buying and selling of bitcoin and other cryptocurrencies.
Different bot trading strategies
Crypto trading bots rely on algorithmic trading in order to run and process complex mathematical formulas and automate and accelerate the trading process.
So, how do you do algorithmic trading?
Trend Following Strategy
This is the simplest trading strategy in which the bot responds to direct market changes. Trend following doesn’t require complex algorithms that need to factor in such things as predictive analysis etc., and so are very simple.
The arbitrage model involves cryptocurrency bots exploiting the difference in prices between the numerous cryptocurrency exchanges throughout the world.
Since there is no one centralized exchange to determine the price of a cryptocurrency – a role that with fiat money is filled by the central banks – for this reason, prices vary from exchange to exchange.
South Korean exchanges, for example, have historically had a higher price than U.S ones, so offering good potential profits for anyone trading between the two.
Trading bots help traders take advantage of this differential by allowing them to trigger trades when certain price differentials are met.
The market-making strategy allows traders to buy and sell high volumes of currency and profit from the spread. In order to be able to trade such volumes, market-making traders rely on trading bots.
For a complete list of the main types of trading strategies, you can read this list.
List of the best cryptocurrency trading bots:
Finally, let’s tackle the most important question – how to build a trading bot.
How to build a crypto trading bot
Do it alone: Download an exisiting open-source bot
There are several ways that you can build a crypto trading bot. The cheapest and easiest approach is simply to find an open-source crypto bot that you can download and use straight away. This requires only a minimal amount of technical knowledge and helps to keep costs and development time to a minimum.
However, in order to build in your own features, continue development, and fix any bugs/security issues, etc., you will need to retain at least one expert software programmer. Since the bot has already been developed, the downside is that this approach often makes it harder to build in your unique features or adapt its trading algorithm.
Best open source crypto bots:
Start from scratch: Get a great dev team together and start coding
Cryptocurrency trading software development can be both a personally and financially rewarding thing for those people who are able to be successful at it. The most important part of this approach is ensuring you have a team that is filled with passion and dedication, as well as all the relevant skills and experience, of course.
The most basic trading bot can be built in a matter of weeks. One such example is the arbitrage crypto trading bot built by Carlo Revelli. His bot allows for the trade between two exchanges, Etherdelta and Bittrex, and was created using his “own python etherscan API wrapper and pythereum to create the transactions and etherscan to publish them”.
You can read more about how he created his bot in his article How to make your own trading bot.
To create a more sophisticated trading bot, which can trade on multiple exchanges, will naturally take more time. More time will also be needed for creating the algorithm and ensuring that there are no obvious security flaws that can be exploited by hackers.
Key steps to creating a trading bot from scratch
1. Decide on the programming language you will use.
Finding a reliable Python trading bot tutorial, for example, can make things much easier for you.
2. Getting hold of your APIs
Before you begin coding you will also need to get hold of the APIs that allow your bot to access whichever exchanges you want your bot to trade on. The good news is that all of the main cryptocurrency exchanges offer APIs to allow access to their currency data.
API links for main currency exchanges:
3. Create accounts with all the exchanges you will use
Account creation is a relatively straightforward task. Please keep in mind that different exchanges have different procedures for setting up new accounts. Some exchanges require personal information to be vetted and approved while others allow for anonymous trading. Vetting takes more time, so factor this in when project planning.
4. Pick a bot trading model
Trend following, Arbitrage or Market Making etc.? Keep in mind that more complex trading models will require more development time.
Your bot’s architecture will have massive implications as to how it functions and performs. Key to a how a bot operates is deciding on the algorithms it will use to interpret data. Algorithmic trading is a massive industry that makes billions of dollars each year in profits.
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For any algorithm, the mathematical model on which it is based must be solid. If it is not then it is likely that the bot will either prove to be unreliable or will end up losing money. You can read more on the topic of mathematical modeling via this link.
Part of the process involves clearly defining the type of data you want your algorithm to interpret. For more complex trading models you will need your bot to be able to identify such things as market inefficiencies etc. This means it will need to be able to analyze historical trends as part of its function.
All of these things need to be considered before you get down to create a trading bot.
Once you have outlined your bot’s architecture you can get coding. Naturally, this will be the most time-consuming part of the process. If you have a team of developers working on different parts of the bot then it is vital to make sure that you have good project management/communications procedures in place.
Start by opening a group chat on Slack or a similar program where every member of the team can talk to one another. Hold weekly meetings to make sure each and every member knows where the project is and what problems have been encountered etc.
Testing has two key functions. Firstly, it is to make sure your bot functions as it should and is able to cope with the kind of data fluctuations that will be thrown at it. Factors such as risk vs. reward and modeling errors such as ‘overfitting‘ should all be evaluated at this stage.
The second function is in fine-tuning performance. Keep in mind that what I mean by performance is optimizing the kind of behavior that you want your bot to exhibit.
By increasing the level of risk that the bot factors in, for example, you increase the chance of higher returns but also decrease the effectiveness of your bot to respond to high levels of price fluctuation, etc.
8. Live Deployment
Once you have ironed out any issues, you are now ready to set your new auto cryptocurrency trading bot loose on the markets. While you might dream of making instant fortunes remember that no platform in history has ever been launched without experiencing teething problems.
A good trading bot is an evolutionary thing. The more you put into its development the more you will get out. Constant monitoring of your bot’s performance is definitely recommended, at least for the first few months. After that, you should be confident enough to let your bot get on with it without much need for supervision.
Cut out the hard work: Pay an outsource development team to create your trading bot
If your company wants to ensure a smooth and easy project development then the best way is to hire a professional development team to do the hard stuff for you. A good dev team is likely to get the project completed in a much faster time and ensure that the bot is the best it can be.
Since a cryptocurrency trading bot will most likely be handling large sums of either yours or your client’s money, reliability is hugely important. Currency markets are built on trust so your bot will need to be 100% reliable for it to be successful.
If you have the budget, do yourself a favor and outsource the project to a great development company.
A word of warning
While I hope this guide has provided you with a good understanding of cryptocurrency bots and the process of creating one, I feel that I should add a few words of warning regarding trading cryptocurrency in this way.
Assuming that you have built yourself a world-class trading bot that has no security or reliability issues, traders still need to be aware of the dangers posed by trading in the cryptocurrency markets.
To start with, cryptocurrencies are still relatively new, meaning the market is largely unregulated. Prices are prone to massive fluctuations, which as I said, does offer the chance to make enormous profits, but inversely also could result in huge losses. Don’t invest money you cannot afford to lose.
A much better idea, now that you have created such a great trading bot, would be to charge others for the pleasure of using your bot so that you can be assured of making money, and without having to take any risks either. Whatever you decide, good luck in creating a great crypto trading bot.
Gathering important ideas: A few relevant apps to study
It helps if you study a few relevant apps and get a few ideas. You can gather some important ideas before you undertake the software development project. E.g., you can analyze the features that these apps offer.
Study the following apps:
3Commas offers a smart trading terminal and auto trading bots. It supports a wide number of cryptocurrency exchanges. This includes popular exchanges like Binance, Bitfinex, Bittrex, BitMEX, Coinbase Pro, Bybit, OKEx, Bitstamp, etc.
3Commas supports various trading algorithms, furthermore, it helps in portfolio management. This app supports paper trading. Apart from automated bots, 3Commas offers public APIs. Developers can integrate them with their apps using the API keys provided by 3Commas.
You can review Shrimpy, a cryptocurrency trading platform. It supports all popular exchanges in the crypto market like KuCoin, Binance, Coinbase Pro, Gemini, etc. Shrimpy calls itself the social trading platform for cryptocurrencies.
The company helps you to incorporate automation in your trading strategy. Shrimpy offers all the relevant features that you would expect in a comprehensive tool for the cryptocurrency market. Finally, the platform has an impressive presence on social media channels like Telegram, Discord, Reddit, etc.
Among the trading bots in the cryptocurrency market, Gunbot is a prominent one. It supports all popular cryptocurrency exchanges.
As other such platforms do, Gunbot helps you to analyze historical data. You can understand market conditions better with the help of market data, furthermore, Gunbot helps you to manage your trading. It helps you to with technical analysis.
You can analyze the effectiveness of your own strategies better with a platform like Gunbot. This platform provides the required trading tools so that you understand profitability in real-time. You can then rebalance your portfolio accordingly.
4. Cryptoshopper: A prominent choice for managing arbitrage, backtesting, etc.
Cryptoshopper is among the more popular crypto trading bots. Whether you want to backtest your trading or manage all your exchange accounts, this platform can help. Automation apart, Cryptoshopper helps you to understand the technical indicators.
Cryptoshopper helps you to judge when you can take profit. It helps you in rebalancing your portfolio, managing your stop-loss orders, and any other relevant functionality. Cryptoshopper supports all key cryptocurrency exchanges.
You might prefer trading pairs involving Bitcoin (BTC), Ethereum (ETH), or Ripple (XRP). Customizable platforms like Cryptoshopper can help you to manage their preferences well.
5. HaasBot: Another famous one among Bitcoin trading bots
HaasOnline, also known as HaasBot, is another famous crypto trading bot. HaasOnline offers more though! You can also use it as a tool to develop and deploy such bots.
HaasBot supports backtesting, notifications, reporting, paper trading, etc. This offers you a feature-rich trading bot.
On the other hand, you can quickly develop a custom trading bot using the framework offered by HaasOnline. It offers scripts, templates, and relevant tools for that. You can include support for the exchanges you want.
HaasOnline supports on-premises deployment, which will help your data privacy requirements. You can also opt for HaasOnline cloud, where you don’t need to manage the IT infrastructure. You can focus on software development efforts.
Key considerations to remember when developing a crypto trading platform or bot
We talked about the key steps involved in creating a crypto trading platform or bot. You also need to keep several considerations in mind. We now talk about them, which are as follows:
1. Creating a robust development approach
You need a sound approach when you undertake a software development project, and that’s true for developing a crypto trading bot too. Your development approach should cover the following:
- Identifying the appropriate technology stack to use;
- Choosing the right set of open-source tools and frameworks;
- Identifying the appropriate cloud platform;
- Formulating the right application security solutions;
- Deciding on the testing and DevOps tools to use.
2. Preparing a comprehensive project plan
Success in this project requires effective planning. Your project planning needs to cover various aspects, e.g.:
- Managing the business and non-functional requirements;
- Choosing the right SDLC methodology;
- Creating the project schedule;
- Planning key aspects like risk management, communications management, quality management, etc.
- Hiring and onboarding the right developers;
- Metrics and measurements;
- Stakeholder management.
3. Hiring the right developers
Hiring the right people is important in any software development project. You need to do that in this project too. The first step is to choose the right hiring platform.
You can hire freelance developers on a freelancing platform. However, managing a project with part-time freelancers can be hard. You might not get enough effort from freelancers. They might leave your project in the middle, and you will need to hire replacement developers.
Choosing a software development company might help when you undertake a complex project. Developing a crypto trading bot involves complexities since this involves niche skills. Software development companies provide full-time developers. They also provide replacement developers if the original developer leaves the project mid-way.
You need to interview the shortlisted candidates. Look for the appropriate skills, which would depend on your project requirements. You might need developers with the following skills:
- Good knowledge of relevant tools, frameworks, libraries, etc.;
- Expertise in appropriate cutting-edge technologies like “Machine Learning” (ML), etc.;
- Sound knowledge of cloud computing platforms;
- Good knowledge of popular relational database management systems (RDBMSs), NoSQL databases, etc.;
- In-depth knowledge of RESTful API development;
- Deep experience in developing scalable applications;
- Sound knowledge of building secure applications.
4. Forming an effective team
We talked about the technical skills, however, forming an effective team is important too. You need developers with the following competencies for this:
- Passion for excellent;
- Commitment to the project objectives.
Form a team that fosters collaboration and delivering tangible values to clients. You might need to form a “Scrum team” since the “Scrum” technique facilitates teamwork.
Focus on following the appropriate processes for this project. This includes project status reporting, resolving issues, etc. Remember to include code review in your project schedule, which helps to detect defects earlier.
Frequently Asked Questions
It is a software application that allows automated trading in cryptocurrencies. The most simple crypto trading bots simply buy and sell currencies according to preset pricing changes while the advanced bots use artificial intelligence to improve their trades to maximize profits.
- Define programming language
- Define APIs
- Set up infrastructure
- Define trading bot strategy and architecture
- Onboard developers
- Outline sprints
- Start building
Cryptohopper is a great cryptotrading bot.