A precipitous drop in prices – like the one that happened yesterday – is bound to have a demoralizing effect on a market in the midst of a bear cycle.
The market plunged at around 11:20 GMT on Sunday morning, as the total value of all cryptocurrencies fell by $6bn in little more than an hour. Bitcoin’s (BTC) market cap decreased by $3bn – $200 per coin – with both Ether (ETH) and XRP taking a $400m hit each.
Out of the other notable cryptocurrencies, Bitcoin Cash (BCH) is down by $6; EOS by $0.10; Litecoin (LTC) down by $2. Stellar Lumens (XLM) was one of the least affected: it’s market cap fell by less than $100m. TRON (TRX) experienced a minor drop but has since recouped all of its losses, having surged in the past hour.
What’s behind the fall?
Sunday’s sudden drop took the market off-guard, in part because there’s no obvious cause to explain the decline. It does not appear to be a reaction to the Constantinople fork, which was delayed last Tuesday.
Josh Bramley, the head of trading at crypto asset management firm BlockStars, says that yesterday’s “fast and aggressive” price movements had all the hallmarks of bot – or algorithmic – trading.
“I strongly believe this market is full of algos [sic],” Bramley wrote in an email. “Bitcoin will go sideways on very low volume for a while then there would be a ‘random move’ which is not based on news or technicals.”
He added: “I don’t buy into the idea it’s a big seller or buyer because we have a very large OTC market in crypto and if you were trading that on an exchange you would be more subtle.”
Algorithmic trading – ‘bots’ – is a computer based form of trading that has become commonplace in most financial markets in the last decade. They facilitate automatic orders, which are triggered by certain conditions or indicators in the market. These algorithms work fast and around the clock, making them ideally suited for frequent trading in multiple time zones.
Bots have quickly replaced humans as traders in traditional markets. The Financial Times found that more than half of all equity trades in the US were executed by algorithms in 2018. They have also become widely used in crypto trading; many large firms already have them and some sites offer algorithms for retail investors too.
But not everyone thinks Sunday’s slump can be quite so easily attributed to bots.
Without discounting the idea, Mati Greenspan, senior market analyst at eToro, said it could have been a whale, or a “chain reaction” of stops and liquidations. In other words, he speculates, it could have been the result of a cascade of ‘sell’ orders, each triggered at a slightly lower market price.
Are bots good for the market?
The space is already “dominated” by algorithmic trading, Bramley says. But that’s not necessarily a bad thing: bots provide markets with volume and liquidity and determine price equilibriums.
But in an immature market – like crypto – bots can also give traders the opportunity to profit from price disparities between exchanges. Otherwise known as arbitrage trading, bots excel at detecting price differences and exploiting them fully.
Frank Wagner, CEO of INVAO, a blockchain asset pool, explains arbitrage trading as “very rapid buying and selling at precisely the right moment on different exchanges.” This practice, he says, also makes markets more secure, potentially attracting more institutional investors into cryptocurrency.
Bramley thinks this key advantage will eventually lead to an evolution in the market: algorithms will take precedence over inexperienced retail traders. Existing bots will be superseded by more efficient bots as margins thin and the market matures.
If trends continue, the majority of crypto trading may soon be limited to a few big firms locked in a constant algorithmic arms race. The Sunday slide is a perfect example of just how closely crypto is following the traditional markets.
The author is invested in digital assets, including BTC and ETH which are mentioned in this article.