August 14, 2019
Bitcoin Analysis Bitcoin News

Algorithmic trading could be a factor behind Bitcoin’s latest surge


The Surge

Something happened this Tuesday, maybe you noticed it. Bitcoin, at long last, went up. Not just up, it surged. It went up by USD 1.000,00 in less than an hour. And as Bitcoin went up, almost every other cryptocurrency raised its value as well.

The trade has been moving sideways after the surge. As we write this, it trades at $5,036.68 which means that, at the very least, it’s managed not to come back down, but it hasn’t grown anymore either.

The most fervent Bitcoin fans are hailing the event as the long-awaited end to the protracted crypto winter we’ve endured for more than 15 months, as the arrival of the new bullish market, and as the renaissance of the world’s main digital asset.

We have all been expecting, even wishing this, of course. But it may be too early to start celebrating the new crypto summer. It pays to try and put things in perspective. Why did this sudden jump in price happen?

Analysts are pointing at algorithmic hedge funds as one of many potential “culprits.”

Algorithmic trading

Algorithmic hedge funds are computer-based speculation strategies that have been rising in popularity, especially in the retail market over the last few years. Experienced human traders in equities, forex and commodities hate them because this kind of intervention can exaggerate the price of an asset, and make exacerbate its volatility. In other words: massive investment by algorithmic-driven investors creates false clues about the market status that end up increasing chaos.

The cryptoverse is no exception. As algorithmic speculation has grown in every market known to man, it’s also increased in crypto. According to the Crypto Fund Research, something like 17 algorithmic funds have gone live since last September. And those are only about 40% of all crypto hedge funds that have popped up during the period.

The likely scenario is that the 20% sudden increase we saw as the Asian market opened on Tuesday would have been triggered by automated investing software that was coordinated to trade USD 100 Million in three exchanges. That’s according to the BCB Group of London CEO, Oliver von Landsberg-Sadie.

Algorithmic investing strategies do not rely on human observation, of course. That’s the whole point. Instead, they keep monitoring the markets looking for a given signal that can trigger an investment at the right time to take advantage of an excellent opportunity.

Some of those robots do thousands of trades daily, while some others do not perform more than two or three trades per week. Another strategy favored by this kind of toy is arbitrage of coin prices or derivatives. And it works.

During the last crypto winter (which we still don’t know for sure to be over) the market lost more than 85% of its value. So some of the best human-managed crypto hedge funds managed to lose 72% “only” while some algorithmic funds reported gains. Modest gains to be sure (from 3 to 10%), but still gains at a time in which we were all losing our shirts.

“Some people are in the camp where algorithmic trading is a manipulative device, and others are of the view that they are a way to make markets more efficient,” von Landsberg-Sadie explained. “I am definitely of the second view.” The BCB Group uses algorithmic trades to maximize gains and advantages for its customers.

According to Michael Terpin, a general partner at the USD 400 million Alphabit fund, it’s been moving its assets into algorithmic trading over the last six months. The deVere Group, which is one of the planet’s most prominent independent financial advisory organizations (it manages more than 10 billion) has been diving into algorithmic cryptocurrency arbitrage since last November.

Autonomous Research says that the years of 2017 and 2018 saw 26 algorithmic funds go live. But many more are around that are just keeping a low profile and going stealth.

The next big thing?

Wei Zhou, the chief financial officer for Binance, the world’s largest and most influential cryptocurrency exchange gave a telephonic interview last month in which he explained that  “These are going to be the new rock stars of our industry, a lot of these smaller guys.”

Zhou continued,

“What we are seeing is a lot of younger, up-and-coming fund managers are trying their hand out in this industry. At least from trading volume and demand perspective, they make up a much larger proportion of the market today.”

Another problem with the rise of algorithmic traders is the increased risk of market manipulations. Spoofing is a common strategy with algorithmic traders. That means that they flood the market with spurious orders. The idea is to send a signal to the market and force it to come along with it.

So in this way, spoofing tricks other traders into buying or selling thus moving the market in the direction the spoofer wanted. Travis Kling, of Ikiagi (a crypto hedge fund based in Los Angeles), explains that “Humans will let things get out of whack in a more extreme manner than machines will,” Algo traders “by definition put a lid on volatility,” he said.

Seven-day annual Bitcoin volatility is of 5.8% currently. It was 13.6% half a year ago, so it’s becoming more stable if you go by CryptoCompare’s data, which tracks data from cryptocurrency exchanges. Last month was the most solid month in the semester according to the firm’s head of research, Constantine Tsavliris.

“Algo trading is much easier in crypto than traditional financial assets,” Aaron Brown, said in an email (he’s a Bloomberg contributor). “Most exchanges have simple APIs — that is, interfaces for automated trading — while traditional exchanges require expensive connections and permissions and have lots of rules. So crypto algo trading has always been an activity for technically sophisticated financial amateurs.”

So what should regular guys like you and me make of all of this? Well, the most obvious answer would be that we should get into algorithmic trading as soon as humanly possible.

But then we should acknowledge the elephant in the room. Is the crypto winter over at last? Well, we hate bad news, but no, we shouldn’t think so. Keep in mind that Bitcoin has had sixteen utterly calamitous months. It’s been a debacle, a total carnage for almost a year and a half.

So how are we to think that things are suddenly okay just because of a good trading hour? Because make no mistake, it was only an hour, literally. As that hour finished the price has remained around the 5k level, but it hasn’t gone up again.

Let’s remember something: even winters can have the odd sunny day some years (unless, of course, you live in a too high or too low latitude) but that sunny day is an anomaly, not a rule. It doesn’t mean that summer will start in February.

You’ll have to wait for June, as every year, if you want to be 100% sure that the winter is long gone. And markets are the same. When the next crypto bull run comes, it will be so apparent that no questions will be needed. And it will last for more than sixty minutes, that’s for sure.

[Image courtesy of Pixabay]

Disclaimer: All information provided through this article should not be regarded as investment advice, nor should be taken for granted for crypto trading purposes. Before making any investment or trading plans, make sure to inquire about the information diligently by carrying out your very own research. Thank you.

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