Which asset should you trade using your trading bot?
Before you start developing your own trading strategy, you’ll want to make sure you know which asset you want to trade. I often get questions like, “Can your trading bot trade PEPEUSDT or SHIBUSDT?” And I always ask, “Why would you trade a so-called ‘shitcoin’?”
In this article, we will go into detail on what to look for when choosing your asset to trade. I will also share some of my own experiences.
CRYPTOCURRENCIES
The world of cryptocurrencies is vast, and new cryptocurrencies are being released every day. While some of them make sense, most of them do not. Many of these “fresh” coins exhibit bizarre price action, with moves of 10% or more occurring within minutes.
Furthermore, when a new coin is released, it often generates a lot of FOMO (fear of missing out) and gains exposure on social media. The coin experiences rapid price increases, known as pumping, followed by an eventual crash. It is extremely challenging to develop a trading system for an asset with no historical data or logical basis. Your usual indicators won’t function properly. For instance, your RSI (Relative Strength Index) will consistently show overbought conditions for an extended period. Simply taking long positions may work during a bullish market, but what trading rules will you employ, and how will you navigate a bear market?
WHICH CURRENCIES TO TRADE
Bitcoin has been around since 2009, Ethereum since 2014, and BNB since 2017. These three coins currently hold the top positions in terms of market capitalization at the time of writing this article. You can observe the stark difference in their price histories. Bitcoin’s price data goes back more than 10 years, while BNB’s spans only 6 years. On the other hand, the price data for PEPEUSDT covers less than a month.
If you intend to trade a cryptocurrency altcoin using a crypto trading bot, it’s advisable to select one with a sufficient history. Aim for a minimum of 2 years of historical data. This allows you to properly backtest your trading strategy in both bear and bull markets. When approaching all crypto assets from this perspective, the number of available assets to choose from becomes significantly smaller.
THE RISK OF CRYPTO MARGINED FUTURES
When you trade COINM futures, which are futures contracts using cryptocurrencies as margin, such as Bitcoin, you aim to profit in crypto while trading crypto. This can be particularly lucrative during a bull market since you choose to have exposure to Bitcoin.
However, what some people overlook is that it works both ways. When BTC is in a bear market and experiences a 10% decline in a month, even if your crypto trading bot performs well with a profitable short position, earning a 5% profit, you would still be down by 5% in terms of USD.
The drawdown in terms of USD can be significant and prolonged. It’s essential to assess your risk appetite in such scenarios.
Another potential issue is related to backtesting. Your backtest results will likely present profit in terms of percentages or BTC. For instance, your bot may perform at 75% over a year, but in 2022, BTC experienced a decline of around 80%. This situation becomes challenging, as running your bot for a year would result in a 5% loss.
To address this, you could consider opting for stablecoin margined futures. When trading these futures, your trading equity is denominated in stablecoins like USDT or USDC. This means that when you are not in a position, you are essentially exposed to dollars. This approach may help you feel more comfortable during periods of asset dumps.
TRADING SPOT OR FUTURES
The choice of product for trading depends heavily on your trading strategy. Additionally, it’s important to note that futures trading is not allowed in many countries, limiting traders to crypto spot trading.
Trading in the spot market during a bull market can be rewarding, but it doesn’t allow for profiting from downward movements in the asset being traded. On the other hand, trading futures enables you to take short positions and profit from downward movements. However, trading futures also carries significant risks. It is crucial to have a solid understanding of what you are doing, as incorrect use of available leverage can lead to liquidation. Conduct thorough research on this topic before getting started.
THE COSTS OF TRADING
Keep in mind that spot trading has a different (mostly higher) trading fee structure then crypto perpetual futures.
What are trading fees?
Crypto exchanges have various ways to earn money for themselves, and trading fees are one of them. When you place a trade on a crypto exchange, you need to pay a fee for each trade you make. For a normal trade, this means you pay a fee two times: when you open the trade and when you close the trade. Trading fees can vary anywhere between 0 and 0.1%. The kind of trade you are making, your VIP level, the asset you are trading, and of course, the crypto exchange determine the amount you pay.
The trading fees on futures are a lot lower. However while trading futures you also have to deal with funding.
What is funding?
In crypto futures trading, funding is a mechanism that balances the contract price with the underlying asset price. It is a periodic payment that traders pay or receive every 8 hours to maintain the contract price’s equilibrium with the underlying asset price. The funding rate is determined by the difference between the contract price and the underlying asset price. For example, if the funding rate is positive, long positions pay short positions, and if the funding rate is negative, short positions pay long positions.
LIQUIDITY AND VOLUME ON THE EXCHANGES
Among the top three cryptocurrencies, BTC holds the absolute king status when it comes to liquidity and volume. Liquidity is a crucial factor as it increases the likelihood of having your limit orders filled and reduces slippage.
In the case of many altcoins, liquidity and volume are so low that the price can be manipulated with just a few hundred dollars. By leveraging the trade and placing a large market order, one can observe significant price pumping or dumping. Furthermore, the slippage on market orders can be incredibly high, with examples of 2% or even more.
Even if you have a great strategy for an altcoin, manage to generate real-life profits, and perform well with a few hundred dollars in trading capital, there is a probability that you may never be able to trade it with a larger capital amount due to the low volume and liquidity.
Therefore, it is essential to be future-proof and not waste your valuable working hours. Choose an asset with a promising future, substantial volume, and sufficient liquidity.
MY EXPERIENCES
There are numerous assets available for trading, and many people often ask me why I only trade BTC and ETH. Well, the main reason is that they have the highest volume, the most liquidity, and a significant price history. Based on my experience, bot trading altcoins tends to be less profitable compared to BTC and ETH. Altcoins often have large wicks that can lead to more frequent stop-outs. Additionally, altcoins have higher slippage, and due to limited price history, there is less data available to test your crypto trading bot.
Once you have chosen an asset, it is also crucial to research and select the appropriate exchange for trading that asset. The volume, liquidity, and trading fees can vary greatly between exchanges. Recently, someone asked me if we could trade BTC perpetual futures on Exchange X. However, upon examining the order book, I noticed that the volume was so low that there would be a slippage of 1% or more for every trade if we were to be stopped out. This was a significant exchange.
Trading on such an exchange would make it nearly impossible to be profitable, so i prefer to stick with exchanges that offer higher volume.
Selecting the appropriate asset and exchange for trading is crucial. It’s highly recommended to conduct thorough research before or at the start of your crypto trading bot journey, as it can determine whether your bot will be profitable or not. Stay safe and happy trading!
