Do Crypto Trading Bots Affect Cryptocurrency Market?
What are the factors that affect the price and value of Cryptocurrencies? This is a basic question that you would expect any Cryptocurrency enthusiast or investor to answer readily.
The volatility of prices and values of cryptocurrencies has made it pertinent to critically observe the drivers of this niche. The factors that immediately come to mind are obvious ones like the price or value of the cryptocurrency.
Another hugely significant factor is the mood of the market players; whether they’re in a state of fervor or panic. You may also point out more subtle reasons like how much the coin or token features in the news.
A good example is when the news of a Chinese crackdown on Bitcoin exchanges led to a drop in BTC price. The above are all fairly valid points, and they surely play significant roles in influencing the direction taken by Cryptocurrency Markets.
However, there is a very big decider of the cryptocurrency market direction that has largely gone unnoticed for a long period of time. Only a few people who are in the know understand how truly important this is. And what we’re referring to here are the trading bots. Those who’ve been on the cryptocurrency streets for quite a while will appreciate this description.
However, if the term trading bots sound strange to you, you have nothing to worry about. We’re going to run through a brief introduction to help your understanding before delving into how these things affect the crypto market scene.
What Exactly Are Crypto Trading Bots?
You might have made the connection between the word bots and the more common term ‘robots’. Well, everybody should know what a robot is; a machine meant to perform tasks that are normally carried out by humans.
Bots certainly have the capacity to carry out tasks that only a human can perform; except for the fact that bots are virtual. Bots are computer programs, applications, or algorithms that are designed to perform actions based on specified parameters.
Bots have been in use even before the current proliferation of cryptocurrencies. For example, there are social media bot accounts that are designed to periodically post stuff about particular topics.
These social media bots are coded to identify particular types of messages and reply to them or comment on related posts. In fact, there’s a good chance you’re routinely interacting with some form of social media bot or the other, thinking it’s a real human account.
Now back to our topic of discussion, trading bots. Trading bots are a special kind of bots created to make decisions about buying or selling cryptocurrencies depending on some indices.
Success or failure on cryptocurrency markets (just like forex or the stock market) is often decided in a matter of minutes or even seconds. Deciding to buy or hold seconds before a dip or boom in prices can make all the difference for a crypto trader’s career and fortune.
It is for this reason that investors and traders in cryptocurrencies are often seeking the best Free Bitcoin Telegram Signals. These signals help them make the right decisions. However, with bots this problem becomes easier to deal with. Bots can be coded to track a cryptocurrency’s value and take decisions on the fly of the moment way faster than a human can. For example, a bot can be set to consistently track the movement of Ethereum value, in order to track the highs and lows.
Although it’s important to keep in mind that a bot can only be as effective as its design or the strategy with which it has been coded. So there you have it, cryptocurrency trading bots are basically just lines of code put together in an application to make trading decisions. Now you may perhaps be wondering how these things would have any effect on a whole cryptocurrency market. Well, here’s where the story gets exciting.
How Cryptocurrency Price Fluctuations Work?
To understand the link between trading bots and cryptocurrency market fluctuations, let’s do a little analysis of trading itself. Trading in any form is a fundamentally psychological activity. From basic high school economics, we learn the relationship between price and demand.
When demand increases, there’s a corresponding increase in price to maximize the sales. Conversely when there’s a greater supply than what is required, the price drop because buyers have a lot of options to choose from.
This principle explains the changes in price that occur on the cryptocurrency market. When a lot of people buy a coin or token (increased demand), the price rises. This rising price will, in turn, attract other investors to buy, and this leads to an increase in value.
However, if the price starts dropping again, a lot of people go into panic mode and start selling. This causes a supply glut and the value of the cryptocurrency takes a plunge.
What Has Crypto Trading Bots Got to Do with It?
We’re finally here!
This is the part where the much talked about Trading Bots come in. Cryptocurrency markets are huge! Bitcoin alone has a BTC value market cap of about $110 billion (and that is with the current plunge in prices). As at January 2018, the total market cap got as high as $700 billion.
Now the point here is that it’s difficult for individuals or even groups of people to make enough trades to influence the market. Making enough purchases to influence the price of a $100 billion market will require an army of traders all trading at the same time.
And this is where trading bots feature. Trading bots can be designed to run transactions simultaneously on various exchanges. This easily gives the impression that the sales or purchases being carried out reflect the actual mood of the market. If you think this is some far-fetched claim or a conspiracy theory, then you’re wrong.
There’ve been real-life incidents where all indications pointed to an obvious large-scale bot manipulation of the value of a cryptocurrency. It is an unfolding reality of the market that cannot be overlooked.
A good example is an incident that occurred in 2014 with the Mt. Gox Bitcoin exchange. A flurry of purchases sent the coin price going up with the increased demand. It turned out, in the end, that all of the purchases were bogus and being done by trading bots. One of those bots was actually known as the Wily Bot. You can read a more comprehensive report here.
It will probably get worse.
Trading Bots are going to be a significant feature of cryptocurrency markets for years to come and here’s why:
- Conscious Pump and Dump Schemes
- The Power of Artificial Intelligence
Towards the end of 2017, Business Insider released an interview with a known cryptomarket ‘pump organizer’. This guy admitted to working with other people to artificially hike the price of cryptocurrencies and make a quick profit before the resulting plunge.
They would do this by pooling people on telegram groups and sending them free Bitcoin telegram signals to buy, hold, or sell. This mass action would be enough to convince other investors to over-pay for the cryptocurrencies and key into the rising demand.
Now, imagine what would happen if these guys added Trading Bots to their repertoire. The possibilities are simply mind-numbing
From face recognition software that beats humans to winning grandmasters at Chess and go, AI is advancing rapidly.
Artificial intelligence has in recent times, being delivering some simply unbelievable results. Instantaneously recognizing patterns and being able to recognize and even optimize them is a key feature of AI. Now, having this deployed with Trading Bots is the stuff of Science Fiction.
The inroads made by AI into financial markets are already mind-boggling. The possibilities here are simply enormous.
What’s to be done?
So, where do we go from here?
Are we helpless against the onslaught of the bots?
Should we just chill and watch algorithms reap all our crypto-wealth for their programmers?
Of course no, here a few tips to help you survive in the Trading bots-infested cryptocurrency markets.
- Be Alert
- Get on the Inside too
Now that you know what’s up, you shouldn’t just react like everybody else any longer. It’s time to get suspicious about sharp dips or hikes in cryptocurrency values. Don’t rush into making buying or selling decisions, rather, be observant and adopt a long-term strategy.
If you’re willing to do the tedious work of learning, trading bots are not that esoteric to figure out. You can decide to learn how to code bots yourself or rather pay to use some already designed bots that are up for sale. We’re not suggesting you become malicious too.
However, with bots, you can make quicker decisions and correct for any arbitrary trend changes. This is particularly useful if your strategy is to go for the quick wins and low hanging fruit.
Whether you see them as a necessary evil or an interesting challenge, Trading Bots are here to stay and we’d better get used to them.
Feature Image Credit: shutterstock.com
Inpost Image Credit: shutterstock.com
DisclaimerThe writer’s views are expressed as a personal opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
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