The fact is that we live within a more automated world today. This notion is true when we go grocery shopping or order an Uber or have our Amazon Prime items delivered within a day. Many of these interactions happen because of automation through technology and advanced coding processes and algorithms.
Indeed, Bitcoin and the resulting cryptocurrency market is one crucial component or evidence of how we, as a society, delve further into the digitization of everything. The crypto niche is fast-paced, it requires depth and excellence. Digital assets like Bitcoin and maybe Ethereum is digital money, and trading takes place every day 24/7. We know that its infrastructure is modern and always on.
We are likely to see more adoption of automatic trading taking place within the traditional and crypto markets as well. High-frequency platforms exist, data mining grows, and more firms in conventional equities and cryptocurrency trading resort to using bots and algorithms in their processes.
You may have realized that BlackRock, a large asset manager, has an artificial intelligence product known as Aladdin, Bridgewater has its own AI tools. Crypto scene participants are adopting automated tools to maximize profits too.
But how does this affect the markets, especially in cryptocurrency?
We know that technology brings with it many blessings and many potential curses. This is a fact, and we see it all around us in our social media interactions, in our workplaces, and other areas, but how will it affect trading and the cryptocurrency in general? We seek to analyze this gravitation to automated bots and understand its effects on the market.
Let’s find out.
How Do Bots Influence the Trading Volume?
Numerous reports note that bots highly inflate trading volumes on exchanges. At first glance this makes substantial sense for all involved in the markets.
Exchanges must make sure to show that it has a wide range of market participants to be a viable entity. Traders will only want to be on exchanges that have substantial volume and activity. Volume matters to traders, as this shows that there is liquidity in the market, ie, when a trade is placed, it will likely be filled and executed.
Bots allow traders to take advantage of incentives given by exchanges, such discounts or potential token earnings. Depending on the incentive structure, traders may create different accounts and use algorithms to make frequent trade and earn tokens.
Simply put, bots allow for different exchange incentive structures and for humans to take efforts to increase their trading volume and activity.
Can Trading Bots Manipulate the Price of Crypto?
It is all about supply and demand in all markets. If there are more buyers than sellers, prices go up, if vice versa, prices go down. If there is a way to create more demand for digital assets such as Bitcoin and other cryptocurrencies in an automated fashion, this can surely increase the price.
Further, if one can find ways to use bots to create significant sell pressure, this can decrease the price.
Experts are divided on this issue, a few such as Andy Bromberg from Coinlist have noted in the past that automated trading tools may have created manipulation, while others believe that markets have evolved to mitigate these concerns.
The crypto assets are attracting more serious players who are in it for the long-term and seek to create long-standing frameworks for better transactions.
Trading Bots and Volatility
Volatility is where the money is in many cases. Flatline markets do not offer any opportunities to conduct activities that create gains or losses. Volatility, therefore, becomes the friend of the traders, and a cause for concern for the different long-term investors or holders. Great automated tools thrive on volatility and can conduct arbitrage, and other relevant actions to capture profits over time.
Automated solutions are handy in a market such as in cryptocurrency where bitcoin can make 30% jumps in value or 40% declines in value over a single day or a few hours.
Those traders who use the correct tools to understand these moves and trade opportunistically can increase their profit percentage over the long-term. Traders can optimize parameters to capitalize on different volatile situations. They can turn to indicators such as Bollinger bands, average true range, and standard deviation.
It is vital to note that if a few experts suspect price manipulation due to bots, you can be sure that they attribute different bouts of volatility to automated trading services as well.
Traders should understand the nature between volatility, profits, and different tools before stepping into the cryptocurrency markets.
Automation VS Exchanges
Exchanges allow bots for one single reason, money. These facilitators of trades only earn money and book profits when they attract further accounts that conduct increase trade activity. These entities must make sure that they maximize opportunities that allow traders to perform trading activities.
Further, they must make it to where their specific exchange is the best or aims to be the best. They can seek to please customers by creating the best environments that allow traders to trade in an optimal manner. Lastly, they must compete with other entities within the sector.
Exchanges can be very profitable, and as many such competitors have flocked to the sector to earn excess profits.
Those who don’t implement trading bot functionalities or API access at least will seem as if they are behind the curve and may lose customers and their respective earnings.
What Will Happen if Only the Bots Will Remain Trading?
Remember, as a famous pop band once said, predicting the predictable causes the predictable to become unpredictable. A bot run market should be very efficient as algorithms would have all the knowledge and pick up the right knowledge at all times.
This type of market, one would expect to be much less volatile. Each bot, would move in unison and act like one if they all have the same parameters and the same programming behind them.
The critical differentiator between services would be the programming at first, but then in all bot trading world, each one should smoothen out and become similar due to the nature of competition.
Many experts do not expect a full transition to an automated environment because of the complexity that is present within the markets.
What Are We to Make of This Situation?
At the end of the day, we can conclude that bots are a net positive for humanity. At first, they may make for a few issues in trading, but markets will smoothen out over time and account for them to create the best environment for the participants. In all markets, one must have a long term view, and bots, over the long term, should add significant value to humans in profit-making.