Let's find out what APIs are and what role they play in cryptocurrency trading.
What is API?
An API is an application programming interface that helps applications communicate with each other. In everyday life, we regularly use APIs, but we do not always realize that we are dealing with them.
For example, when we search the Internet for a house to buy, we find a website that uses the site's API to retrieve information from that resource's corresponding real estate database. Here are examples of commonly used APIs:
Google Maps, MapQuest, etc. - API that provides access to information from satellites and GPS maps; Yahoo Finance - an API that provides financial statistics data and allows you to create charts based on such data; DoorDash - API that allows you to get information from restaurant menus; E-TRADE is an API that allows you to view prices for specific securities.
APIs are created by some developers for others as a set of ready-made classes, functions, procedures, structures, and constants in a certain format - so that as a result, a user on another site or in an application can get information that is easy to understand.
For example, if E-TRADE did not have an API that allows you to get up-to-date data on stock prices, then investors would have to call a real trading platform and talk to a broker who can provide such data by looking at the computer screen of the internal network of this companies. (Although, this network must receive such data from somewhere, using the API).
Thus, to get the exact time in London, Singapore, or Dubai into your application, you use the API from the corresponding resource. To see a picture from the NASA space telescope, you can also use the corresponding API from the website of this agency.
Cryptocurrency APIs allow you to get up-to-date information about digital currencies and their prices from sites such as Binance, Coinbase, or others. In particular, these can be:
information about the current price of a particular cryptocurrency; data on the volume of trades; open, close, high and low prices, etc .; historical data on the trading of certain cryptocurrencies; newsfeeds reflecting the situation in the cryptocurrency market; rating of coins by trading volume, popularity, etc.
Having received such data, you can use it to optimize trading manually or using bots, as well as for other purposes, for example, to post information on your website.
Placing trades using the API
Professional traders use the API to place trades on exchanges. The API, in this case, allows you to set the time of the deal, the entry/exit point, take profit and stop loss levels, etc.
The API also allows traders to improve their trades by using combined data. For example, the price API can be combined with data from the trade history when placing sales to analyze the profitability.
How APIs are used in cryptocurrency trading bots
Trading bots also use API and place trades using such data. Here are the most common examples of how cryptocurrency trading bots work:
Arbitrage bots investigate the cryptocurrency market using the API for arbitrage profit opportunities and place appropriate trades. For example, if a bot sees that one or another cryptocurrency is undervalued on one exchange and overvalued on another, then this becomes a signal for making a transaction that allows you to make a profit due to the price difference on the exchanges;
Impulse trading bots use the API of cryptocurrency platforms to calculate the strength of the momentum of the price movement of a cryptocurrency, trying to "predict" the price (for example, its growth) and placing the appropriate deal to make a profit;
Trading bots that use the rule/law of alternation (“the market does not show itself the same way twice in a row”). APIs in this case are used to calculate the average price for a certain period. If the price deviates too much from this level, then the principle of average value recovery tells the bot that the price will return to the average value and that it is time to place the corresponding trade to make a profit.
Are the APIs safe to use?
Thus, modern automated cryptocurrency trading relies entirely on APIs that transmit information to trading bots that can analyze the market situation and make decisions that are beneficial for users.
In essence, API is the use of public (most often) data in your applications for profit, and it is unlikely that this is aimed at stealing your funds. Your security can only be compromised if an attacker can get into your account with wallets and funds.
On the other hand, over-reliance on bots that rely on APIs can be risky, as they may not take into account some variables that are important to your strategy (this will also depend on the settings and specifics of the bot code itself). You should also make sure that the bot does not risk the entire amount that is contained in your wallet, but only uses the part of it that you are willing to risk.