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ExploreA crypto trading bot is software that places orders for you based on rules you set in advance. Crypto trades around the clock, so a bot can act at 3am on a Sunday while you sleep. The catch is that a bot only executes a strategy faster and more consistently. It does not make a losing strategy profitable, and most retail bots lose money.
This guide covers the main bot types, how they work, whether to choose or build one, the scams to avoid, and what changes when a bot runs on a prop firm evaluation with fixed loss limits.
Quick answer: A crypto trading bot is a program that connects to an exchange or trading platform through an API and places buy and sell orders automatically when preset conditions are met. The common types are DCA, grid, trend following, arbitrage and market making bots. A bot removes emotion and fatigue, but it cannot create an edge the strategy lacks.
Highlights of this article
- A crypto trading bot automates a fixed rule set through an API, so it can trade 24/7
- The five main types are DCA, grid, trend following, arbitrage and market making, and each suits a different market
- Buying a bot is faster, building one gives you control over the logic
- Regulators warn that bots promising guaranteed or very high returns are a common fraud pattern
- On Velotrade, bots are allowed through the DXtrade API, but grid and arbitrage bots are prohibited and the loss limits apply to every automated order
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Get funded from $40Crypto trading bot: key facts
| Item | Detail |
|---|---|
| Definition | Software that places crypto orders automatically when rule based conditions are met |
| How it connects | An exchange or platform API, usually REST for orders and WebSocket for live prices |
| Main types | DCA, grid, trend following, arbitrage, market making |
| What it cannot do | Turn a strategy with no edge into a profitable one |
| Biggest risks | Overfit backtests, regime changes, bugs, leverage, API key theft and scams |
| On Velotrade | Bots allowed via the DXtrade API at no extra fee; grid, arbitrage, tick scalping and HFT are prohibited |
What is a crypto trading bot?
A crypto trading bot is a rule set written in code that reads market data and sends orders without a human clicking anything. The rules can be as simple as "buy 100 USD of bitcoin every Monday" or as complex as a multi indicator system that sizes each trade from recent volatility.
Every bot has four parts: a data feed (live prices and account data), strategy logic (when to enter, exit and how much), execution (turning decisions into API orders) and risk controls (stops, position limits, a daily loss cap and a kill switch). Beginners focus on the strategy. In practice, risk controls and error handling decide whether a bot survives its first bad week. For the build steps, see how to build a trading bot.
What types of crypto trading bot are there?
There are five main families. Each assumes something about the market and fails in a predictable way when that assumption breaks.
| Bot type | Works best when | Fails when | On a Velotrade account |
|---|---|---|---|
| DCA | You want long term exposure without timing entries | Price falls for months and the bot keeps adding | Versions that keep averaging down count as risk abusive |
| Grid | Price chops sideways inside a range | Price trends out of the range | Prohibited |
| Trend following | Markets trend for weeks | Markets chop, producing repeated small losses | Allowed |
| Arbitrage | Prices diverge across venues | Fees, transfer delays and faster rivals close the gap | Prohibited |
| Market making | Liquid, stable markets with low fees | Price moves sharply and leaves the bot holding inventory | Not practical; high speed order placing or cancelling is prohibited |
DCA bots
A dollar cost averaging bot buys a fixed amount at regular intervals regardless of price, which Investopedia describes as a way to reduce the impact of timing. Many crypto DCA bots also add "safety orders" each time price drops by a set percentage. Each one enlarges a losing position, so a long decline on leverage can burn through a loss limit fast. The Velotrade rules list "continuously adding to a losing position (averaging down)" as risk abusive behaviour.
Grid bots
A grid bot places buy orders below the price and sell orders above it at fixed steps. Binance describes it as placing orders at preset intervals within a configured price range to profit from small price changes. Grids work in sideways markets and struggle in trends. The grid trading bot guide covers the maths. Grid trading is prohibited on Velotrade accounts, so treat it as an exchange only tool.
Trend following bots
A trend bot enters in the direction of an established move using signals such as moving average crossovers or channel breakouts. It loses often in small amounts and earns most of its profit in a few large trends. See trend following for the logic.
Arbitrage bots
Arbitrage bots look for the same asset priced differently on different venues. Makarov and Schoar found large, recurring arbitrage gaps between crypto exchanges, mostly across countries, and linked them to capital controls. For a retail bot, fees, withdrawal times and faster competitors usually close a gap first. Arbitrage, including latency arbitrage, is prohibited on Velotrade. Our crypto arbitrage explainer covers the different types and why the gaps rarely survive costs.
Market making bots
A market maker quotes a bid and an ask at once and tries to earn the spread. The inventory risk model by Guéant, Lehalle and Fernandez-Tapia shows the core problem: when price moves sharply, the bot is filled on one side and left holding a position it did not want. It also needs deep order book data, low fees and a very fast connection.
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How does a crypto trading bot work?
A typical bot runs as a loop on a server. It authenticates with credentials stored as environment variables, streams prices and account changes over a WebSocket, checks its rules on each update, checks risk limits before any order, sends orders through REST calls, and logs every decision.
Run it on a cloud server (a VPS), not a laptop. The crypto market never closes, and a computer that sleeps or loses Wi-Fi can leave a position unmanaged. The bot must also survive disconnects, rejected orders and session timeouts without crashing.
Should you choose a crypto trading bot or build one?
| Off the shelf bot | Building your own | |
|---|---|---|
| Time to start | Hours | Weeks to months |
| Transparency | Often a black box | You know every line |
| Flexibility | Limited to the settings offered | Anything you can code |
| Main risk | Hidden logic, inflated marketing, API key exposure | Bugs, overfitting, your own blind spots |
If you buy, look for a clear explanation of the strategy, the ability to backtest it yourself, and API permissions that allow trading but never withdrawals. If you build, start with one simple rule and test it with backtesting before adding complexity. AI coding assistants speed this up; the AI trading guide shows how to use them without trusting the output blindly.
What are the risks of crypto trading bots?
- Overfitting. Bailey, Borwein, López de Prado and Zhu showed that when you test many variations on the same data, the best backtest is likely a fluke. The more settings you tried, the less you should trust the winner.
- Regime change. A grid built in a quiet month meets a trending month. A trend bot meets a sideways year.
- Leverage. On perpetual futures, a small bug or fast move becomes a large loss. Holding costs such as the funding rate add up too.
- Costs. A strategy earning 0.1% per trade before fees and slippage can lose money after them.
- Operations and security. Lost connections and duplicate orders leave positions unmanaged, and an API key with withdrawal rights is a target.
The honest summary is that most retail bots lose money: the strategy never had an edge, or the edge was smaller than the costs.
How do you spot a crypto trading bot scam?
Regulators publish specific warnings. The CFTC advisory "AI Won't Turn Trading Bots into Money Machines" describes schemes promising unreasonably high or guaranteed returns from automated trading. In one case it cites, the operator of Mirror Trading International took more than 1.7 billion USD in bitcoin from at least 23,000 people. He promised at least 10% a month from a "proprietary bot" and used demo accounts to show fake balances. The SEC has issued a similar alert on Investor.gov about frauds that use AI claims as a hook.
Red flags:
- Guaranteed returns, fixed monthly percentages or "100% win rate" claims
- Sending funds to the operator instead of keeping them in your own account
- Referral bonuses and pressure to deposit quickly
- Performance shown only as screenshots, with no verifiable track record
- Requests for API keys with withdrawal permission, or for your exchange login
A legitimate tool never needs custody of your funds and never promises a return.
Run it on funded capital
Run your bot on a funded account from $40
Bots and EAs are allowed on challenge accounts, with full REST and WebSocket API access at no extra fee, no consistency rule and a static drawdown floor your risk code can rely on.
Get funded from $40How do you run a crypto trading bot on a prop firm evaluation?
An evaluation lets you test a bot with real stakes and a capped downside: if the bot breaks a rule, you lose the fee, not your savings. The firm's rules apply to every order the bot sends. At Velotrade, a multi-asset prop firm offering simulated evaluations, they are:
- Automation is allowed. EAs, bots and algorithmic strategies are permitted on every account through the DXtrade REST and WebSocket API, with no extra fee or approval. See the DXtrade API guide and the API access page.
- Some strategies are prohibited, manual or automated. The rules list grid trading, arbitrage, tick scalping and high frequency trading as prohibited strategy types. Latency arbitrage, exploiting stale prices, coordinated multi-account bots and continuously averaging down a loser are also off limits. Automating a strategy does not exempt it from any rule.
- Copy trading is allowed only between accounts you own. Commercial EAs and public signal services that anyone can buy are permitted. See how to evaluate crypto signals before you automate one.
- Static maximum drawdown: a fixed dollar floor set from the starting balance, 10% on CLASSIC 2-Step, 7% on CLASSIC 1-Step and 3% on PRO 1-Step.
- Daily loss limit: 5%, 4% or 3% by plan, reset at 00:30 UTC from the higher of balance or equity, and monitored against live equity.
- Crypto costs: perpetuals priced off KuCoin USDT perpetuals, 0.03% commission per side and a flat 0.05% overnight charge on positions open at 00:30 UTC.
So grid, arbitrage and market making bots, and DCA bots that keep averaging down, are exchange only tools. Bots with an analytical entry and a fixed stop fit: trend following, breakout and swing systems, or mean reversion rules with a defined exit.
Worked example: a trend bot on a CLASSIC 2-Step 10K account
A trend bot trades BTCUSD on a 10,000 USD CLASSIC 2-Step account.
- Static floor: equity must stay above 9,000 USD (10% max drawdown).
- Daily limit: 5%, or 500 USD on day one.
- Risk per trade: 0.5% of the starting balance, 50 USD.
- Size: with a 2% stop, 50 / 0.02 = 2,500 USD notional, or 0.25x, well inside the 10x challenge leverage on BTC.
- Costs: 0.03% x 2,500 x 2 sides = 1.50 USD per round trip, plus 1.25 USD per night held through 00:30 UTC.
The kill switches: no new trades after 300 USD of losses in a day (60% of the daily limit), and a full shutdown if equity falls below 9,300 USD, a 300 USD buffer above the static floor. At 50 USD per trade, that is six losers before a daily pause and twenty before the hard stop.
Check your own numbers in the position size calculator and the crypto futures calculator, then compare plans on the challenges page. For more, browse the algo trading library and risk management in trading.
Velotrade provides education and simulated trading only. It is not a broker and is not regulated as a financial institution. Nothing here is investment advice, bots can lose money, and past or backtested results do not predict future results.
Sources
- CFTC, "Customer Advisory: AI Won't Turn Trading Bots into Money Machines": warning signs of bot fraud and the Mirror Trading International case.
- Investor.gov (SEC), "Artificial Intelligence (AI) and Investment Fraud: Investor Alert": how fraudsters use AI claims to attract investors.
- Binance, "What Is Spot Grid Trading and How Does It Work?": how a grid bot places orders at preset intervals within a range.
- Makarov, I. and Schoar, A. (2020), "Trading and arbitrage in cryptocurrency markets", Journal of Financial Economics: large, recurrent cross exchange arbitrage gaps.
- Guéant, O., Lehalle, C.-A. and Fernandez-Tapia, J., "Dealing with the Inventory Risk. A solution to the market making problem": inventory risk as the core problem for market makers.
- Bailey, D. H., Borwein, J., López de Prado, M. and Zhu, Q. J., "The Probability of Backtest Overfitting": why the best of many backtests is often a fluke.
- Investopedia, "Dollar-Cost Averaging (DCA)": definition of dollar cost averaging.
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About the author
Vittorio De Angelis
Executive Chairman
Former equity-derivatives trader at JP Morgan, Dresdner Kleinwort and Bank of America in London. Later Head of Brokerage at a global broker in Hong Kong.
Velotrade was founded in Hong Kong in 2016 by a team from JP Morgan, Dresdner Kleinwort and Bank of America, has paid out over $2.5 billion to its trade-finance clients, and has been featured in Bloomberg, the Financial Times, the Wall Street Journal and on Nasdaq. Its prop trading evaluations are simulated and educational.
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