Once upon a time, a cryptocurrency transaction resembled a drug deal. Buyers and sellers met in-person, exchanging wads of cash for a private key scribbled on a slip of paper. A buyer could lose everything simply because the seller had bad handwriting.
But in the ten years since Bitcoin’s genesis block, cryptocurrency trading has transitioned from a park-bench market to a multinational, multi-billion dollar, industry. Exchanges, dark pools and OTC desks buy and sell virtual currencies at rates which were inconceivable a few years ago.
Among the latest developments are trading algorithms, or ‘bots,’ which automatically execute orders when certain conditions or indicators are met. They work around the clock and can spot the tiniest, most fleeting-disparities – the first flickers of a trend – by processing vast sets of data.
These algorithms are found in most markets. The Financial Times calculated that half of all equity trades in the US were done by bots. They are also prominent in cryptocurrency, to the point that some media outlets attributed last week’s ‘bitcoin boom‘ to bots mass-buying Bitcoin after misinterpreting April Fool’s articles.
The growing market for trading algorithms
There’s a sense of powerlessness here: human brains simply cannot compete with an algorithm. Without algorithms, retail investors are effectively shut-out from a large part of the market, while large institutions make fortunes.
But in the past few months, several companies have begun to offer new products which provide access to the same technologies and strategies that had once been exclusive to institutional traders.
This month, Hummingbird open-sourced code for retail or institutional traders to build their own high-frequency trading (HFT) algorithms. A Google search for ‘crypto trading algorithm’ yields a flood of adverts from bot providers, tutorial videos and even comparison websites.
But is this a positive development? After all, a badly-designed algorithm could lose a fortune through poor investing. It might respond to the wrong signals or simply be poorly- programmed, making erratic and unpredictable calls.
Then there’s the damage that a rogue bot might do to the wider market, creating sudden price movements which are then picked up and acted on by others.
For the people, by the people
Anthony Lesoismier-Geniaux is chief strategy officer (CSO) and co-founder of Swissborg, a blockchain-based wealth management platform developing its own trading algorithms for investors.
Lesoismier-Geniaux doesn’t see any danger in providing bots to retail investors. On the contrary, he told Crypto Briefing over the phone, it is entirely appropriate.
Crypto is different from traditional asset classes, explained Lesoismier-Geniaux. Not only are tokens a store of value, they give holders access to blockchain technology. In his opinion, this gives users the freedom to make their own decisions – good ones as well as bad. “Bitcoin hasn’t been engineered by banks: it is made for people by people,” he added.
Education is important, Lesoismier-Geniaux notes, and traders should do their research. But in his view, giving retail investors access to trading algorithms also “gives more freedom to the individual.“ It puts regular traders on the same playing field as the largest financial institutions.
No one really knows where the market is going, he said. “But by providing the right tools they [retail investors] can make their own decisions on where to invest and how to invest.”
‘Potential to get burnt’
Not everyone is so optimistic. David Thomas, Director of GlobalBlock, warns that without a regulatory body or legal framework, investors using these algorithms can be left unprotected.
“There is potential for said investors to get burnt either by the underlying service providers or indeed by their own naivety within the market and the decisions that they make,” Thomas said.
For Ben Morley, CEO of Digax, a cryptocurrency payments provider, the importance lies in ensuring that risk is properly managed. Service providers, like Swissborg, “should be adequately equipped to handle the risks that come with retail or more unsophisticated investors,” he said.
Bots in the balance
It’s hard to determine how strongly trading algorithms will affect the market as they become widespread. On one hand, investors without the right level of understanding could be put in danger, and a lack of regulation would let unscrupulous providers go unpunished.
On the other hand, bots give retail investors the opportunity to fully participate in the market. They fit in with the core principles of decentralization, removing middlemen and allowing individuals to interact directly with the market.
Overall, the scales seem to tip towards the benefits of trading algorithms. Any investor looking seriously into algorithms and advanced strategies may already have the right level of knowledge in order to use them effectively, Thomas observed. Providing access, in his opinion, would encourage a “further thirst” for the overall space and how it operates.
That, he says, can only be a good thing.