Algorithmic Trading vs Mining

Algorithmic Trading vs Mining

Algorithmic trading vs mining is an interesting dynamic of study. What are the pros and cons of each and can one choose both?

What Is Algorithmic Trading?

Algorithmic trading (also known as algo-trading, automated trading, or black-box trading) is the process of automatically placing a trade using computers programmed to follow a predefined set of instructions (an algorithm). Crypto algorithmic trading usually requires direct communication with cryptocurrency exchanges.

Algorithms outperform manual trading in terms of accuracy, speed, and efficiency and are unaffected by emotions. By eliminating the impact of human emotions on trading activities, markets become more liquid, and trading becomes more systematic. Algo trading employs a variety of mathematical doctrines and algorithms to identify the best buying and selling opportunities.

To trade on a cryptocurrency exchange using an algorithmic trading system, you must grant the trading software API access to your cryptocurrency account. Once connected, the trading software will then trade for you based on your settings. You can revoke the system’s permission to trade in the same way you permitted it.

Pros of Algorithmic Trading

Backtesting opportunities: Backtesting in an algorithmic trading system refers to when an investor looks to history for hints on how to invest in the future. While forecasting the future is difficult, backtesting increases the likelihood that the underlying asset will perform as expected. You can use this strategy to refine your algorithms against historical data to find the best combination of buy and sell parameters.

Emotionless trading: The main advantage of algorithmic trading is that it removes emotions from trading because trading programs lack human emotions. Traders get caught up in fear of missing out (FOMO), especially during periods of high volatility, and abandon their trading plan, resulting in poor judgment and decision-making, which increases the likelihood of losses.

24/7 trading: The cryptocurrency trading market is a 24-hour economy with new developments occurring every second. Traders must constantly be aware of what’s happening in the market and respond to these changes on time- which is nearly impossible.

Algorithmic systems, on the other hand, can monitor the market at any time of day and will execute trades when the desired market conditions appear. This means that even when you are away you are ready to respond to the fast-changing crypto market changes.

Cons of Algorithmic Trading

Complicated and Expensive Software: Algorithmic trading is mostly limited to large trading firms such as investment banks and trading firms with the resources to build their proprietary trading software. However, the software is also used by experienced proprietary and quantitative traders. Quantitative traders are usually tech-savvy enough to create their software.

Proprietary traders, on the other hand, may not be as tech-savvy and rely on software from their brokers or third-party vendors. Off-the-shelf Algo-trading software or apps present good opportunities to get involved in the space. If you’re thinking about buying off-the-shelf Algo-trading software, it would make sense to perform some research like you are doing right now.

Security issues: While most algo-trading systems are generally secure, they require you to store your funds in an exchange. Keeping your cryptocurrency in an exchange increases the risk of losing your funds if the exchange happens to get hacked.

There have also been instances of scammer systems promising deals that are too good to be true. Before paying for the services of an automated trading system, conduct thorough research on the provider and read the fine print. Also, make sure to look at user reviews across multiple platforms for further confirmation.

Over-Optimization: In addition to backtesting, some trading platforms have an optimization tool that enables users to specify a range for the input and instructs the computer to determine which input would have worked best for their trading strategy.

Users can enter a variety of variables into systems with multi-factor optimization to see how they affect the outcome. This method of backtest optimization frequently results in an “over-optimized”  trading system that appears effective on paper but performs poorly in reality. This is because the strategy is too complicated for the system to use in the real world.

A Bit on Mining

Crypto mining is the competitive process of verifying transactions and adding new blocks to a cryptocurrency’s blockchain using the proof-of-work (PoW) mechanism. The miner who verifies the transaction first receives a reward in the form of currency and/or transaction fees. Miners can choose to mine alone or as part of a pool. Miners in a pool pool resources to mine faster and share profits.

Pros of Mining

Profitability: With a powerful mining setup and knowledge of the most profitable coin to mine, mining can be a lucrative venture. The more powerful the setup, the more likely it is to make more money than was initially invested in building the rig.

Flexibility: Volatility in crypto markets does not always have to be a bad thing. Miners can take advantage of price rallies as a once-in-a-lifetime opportunity for high ROI, providing them with financial security. Additionally, because it is censorship-resistant and available everywhere, crypto can serve as a store of value during periods of unpredictability or financial crisis.

Software rewards: The software rewards users for donating their system for mining in a specific cryptocurrency. For example, a bitcoin miner will be rewarded by the software they’re using for their “troubles.”

Cons of Mining

High cost: As more people get into crypto mining, the cost of setting up a profitable rig or farm has shot up. Not to mention the hefty electricity bills that will accrue if your computer is mining for extended periods.

Fraud risk in mining pools: In the past, some mining pools have been found to be dishonest in their operations and defrauding investors. Miners are advised to only work with trusted mining pools and providers with established authority within the blockchain community.

Price fluctuation: Crypto price fluctuations cause losses not only for traders but also miners. During bear markets, miners find themselves losing money rather than making profits. Miners should assess the current market structure to determine whether they should liquidate mined assets to cover operational costs, or ramp up and mine more coins.

Which One Has More Long-Term Sustainability?

Without mining, PoW cryptocurrencies like Bitcoin would not exist. Miners use cryptographic algorithms that are extremely difficult to reverse-engineer but whose output is easy to verify to add new blocks to the blockchain. Algorithms not only help to mine crypto, but they also ensure a single transaction history for each coin, avoiding the problem of double-spending.

In fact, machine learning algorithms are evolving into a key component of the financial industry as more and more trading firms and retail traders explore Algo-trading strategies. Traditionally, miners used to run cryptographic calculations on the CPU of their personal computers.

The more cryptographic hashes a miner can perform in a second, the more likely he is to mine a new block. However, as technology advanced, application-specific integrated circuit (ASIC) miners rendered the use of the traditional method nearly impossible. This is where algorithms come into play.

Key Takeaways

  • Algorithmic trading eliminates human emotion from trading by using codes to open and close trades when certain market conditions are met.
  • Crypto mining involves using a proof-of-work (PoW) mechanism to complete a series of complex cryptographic calculations to add new blocks to a cryptocurrency’s blockchain.
  • ASIC miners have made traditional mining nearly impossible, and algorithms are stepping in to fill the void as a more advanced alternative.

Experience Algorithmic Trading First Hand

Interested in algorithmic trading while avoiding the cons listed above? Feel free to give Stoic AI a try! Stoic has 3 built-in algorithms, or trading strategies, designed to help your crypto portfolio grow even during harsh market conditions. Download Stoic AI on Google Play or the App Store to get started!

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Ken-Melendez-Cindicator--125---125-px- Ken Melendez
✍️ Head of Content @ Cindicator
📊 Certified Bitcoin Professional
🔐 Blockchain Chamber - Chapter President

Who is Cindicator?

Cindicator is a world-wide team of individuals with expertise in math, data science, quant trading, and finances, working together with one collective mind. Founded in 2015, Cindicator builds predictive analytics by merging collective intelligence and machine learning models. Stoic AI is the company’s flagship product that offers automated trading strategies for cryptocurrency investors. Join us on Telegram or Twitter to stay in touch.


Information in the article does not, nor does it purport to, constitute any form of professional investment advice, recommendation, or independent analysis.