To be able to understand how much bots can influence the price of cryptocurrencies, we first need to understand what trading bots are. While financial markets long relied on discretionary trading in the past, technological advancements allowed for the development of automated trading systems – trading bots and other algorithmic solutions – over the last decade or so.
Trading bots can therefore be described as programs developed by traders to execute an automated trading strategy, rather than a decision-based one. These automatic systems have been built to monitor and analyze markets (as well as a large amount of other information, such as social media, market sentiment, or any other activity with a correlation to market movements) ultra-quickly, as well as to follow specific trading rules when markets display specific trading configurations, all without human intervention.
Trading bots are employed to save time in the trading process while reducing human error, which should ultimately increase profits
This is especially true when it comes to cryptocurrency trading, as it is a very volatile market. When manually Bitcoin trading (or any other digital currency for that matter), you need to take into account a lot of information, not to mention that prices move so fast that it is sometimes really hard to follow everything that’s happening. This is where trading bots are useful, as they can quickly spot market shifts and take advantage of them before everyone else by acting when opportunities present themselves.
By allowing automated investment methods, trading bots are used in high-frequency trading strategies and the cryptocurrency market has been attracting many algorithmic traders over the years. First, this market is open 24/7, so it is possible to take advantage of the countless opportunities that arise anytime. Second, it’s a very volatile market, which means that, while it can be risky, there will be many wild price movements to trade on.
Which are the positive and negative impacts of crypto bots on the cryptocurrency market?
Trading bots on the cryptocurrency market can add market liquidity and efficiency. However, due to its relatively small size, especially compared to some traditional markets like the stock market, bots can more easily manipulate prices or exchanges’ trading activity (wash trading). It is common to say that 95% of the trading volume observed on unregulated crypto exchanges is “suspect”.
High-frequency trading also influences trading fees to be sure their orders are dealt with first on decentralized exchanges. There is also the “pump and dump” method by which scammers use bots to make other traders believe that a coin, usually a small one whose price hasn’t really moved for a while, is starting to experience increasing trading activity. This rise in prices starts a bull run, triggering FOMO (Fear of Missing Out) in the minds of some traders, leading them to dive in and start buying.
Is there a future for bots and cryptocurrencies?
Both trading bots and cryptocurrencies are here to stay, and trading bots are increasingly used in the crypto market. Therefore, the influence of these automated solutions to trade cryptocurrencies should not be understated, as they’re helping traders to take advantage of many trading opportunities. Bot intervention is very likely amplifying price movements, and there are also sometimes price and trading activity manipulation.
Disclaimer: This is a paid post and must not be considered as news/advice.
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