AI In Cryptocurrency Trading: The Big Picture
Artificial intelligence, blockchain development, and automated trading. How will they shape the crypto economy?
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Blockchain technologies and decentralized networks have revolutionized our perception of how money works. Transferring funds, paying taxes, and even getting a cup of coffee at Starbucks will never be the same again.
The possibilities are limitless, and the best part is that everyone gets a fair shot! With the rise of DeFi, a completely new exchange market has developed in the midst of DEXes (Decentralized Exchanges).
Crypto is several times more volatile than typical Fiat markets, and trading may be extremely challenging even for the most experienced traders. Luckily, Blockchain isn’t the only high-tech innovation to emerge in recent years.
Artificial Intelligence, Machine Learning, and Neural Networks all made their debuts, and they aren’t going away anytime soon. They’ve already impacted a variety of industries, but today we’ll look at how they’re affecting cryptocurrency trading!
Cryptocurrencies versus Fiat Money
Let’s break down the key similarities and differences of fiat vs crypto.
Similarities:
- Store of value — Both can be used as means of saving and allocating capital
- Frictionless payments — 1USD is 100 cents, while 1BTC is 100M satoshis
- Medium of exchange — The perceived value is accepted as a form of payment
Differences:
- Fiats can have a physical form, while Bitcoin type of currencies are ENTIRELY DIGITAL
- Cryptocurrencies are NOT regulated by central authorities or backed by governments
- Cryptos DON’T require an intermediary to validate a transaction, like a bank in the case of fiat money.
- Fiat cash loses value because of inflation, cryptos aren’t affected, and some even argue that they’re DEFLATIONARY.
Cryptocurrencies are an entirely new type of money that needs help from more advanced technologies to operate efficiently.
Photo Via Unsplash By: Dmitry Demidko
Decentralized Exchange (DEX) versus Foreign Exchange (FOREX)
We saw how cryptos and fiats differentiate but how do their markets differ? Let’s look at several categories to determine it.
Volatility
Bitcoin is significantly more volatile than fiat currency. The transaction’s speculative nature, in which speculators want to make quick money by booking profits, is mostly to blame for the volatility.
Risk
As a result, trading with cryptocurrencies is tremendously risky for rookie traders and, on occasion, professionals.
Investment
If you consider Bitcoin, Ethereium, and other DeFi projects as a long-term investment, this would not be a deal-breaker because there are other essential considerations to make.
Trading
Both markets offer an opportunity for active trading. While algorithm-based trading bots have demonstrated success with classical market pairs, there’s a need for using AI in crypto exchanges.
Takeaway: DEXes are a lot more volatile and riskier than traditional markets like stocks or forex. Again a demand for automation and control is needed.
How AI Improves Crypto Trading
Throughout the years, analytical traders created hundreds if not thousands of different chart patterns and price indicators to help you get the most out of the market conditions.
Do traditional strategies work?
- While it’s speculative at best if they even work for traditional trading, we can agree that some groups of people are very successful with them.
- Cryptocurrencies have more frequent sudden price changes and show bigger amplitude in price. The DEXes are up 24/7, unlike FOREX that runs Mon-Fri.
- Traditional strategies fail most of the time with crypto and are quickly overtaken by new, revolutionary ones.
Solution with the help of AI
- Crypto trading needs to be adaptive, but how can we do that? Simple — with the help of artificial intelligence, machine learning, and neural networks!
- Imagine cloning the best crypto trader in the world several times and forcing him to learn from a decade of data.
- After that, consolidate all of that knowledge into a single trader and repeat the entire process a few times.
- That is the power of machine learning, and it is now time to see what it can do for YOUR crypto trading.
It’s time to explore the advantages of AI in cryptocurrency trading.
Better Sentiment Analysis Using Artificial Intelligence
Problem/Solution
- To evaluate the sentiment of the cryptocurrency market, massive volumes of data sources must be gathered and analyzed.
- That covers media, journals, articles, forums, online posts, stock internet forums, and others…
- Machine learning can detect market manipulations using AI. Investors will know what to do with the insights discovered in the data.
Common methods of sentiment analysis for evaluating the crypto market:
- Polarity analysis examines assertions and assigns labels based on whether they are positive, negative, or neutral.
- Tone/emotion: NLP can be used to analyze the text’s emotion or tone.
- Aspect-based sentiment analysis categorizes data by the specific company or service and detects the sentiment associated with each one.
How AI offers a better and quicker way for sentiment analysis?
- Machine learning is based on evolutionary strategies, making finding the most optimal setup an automated and faster process.
- Computers can process a lot of data, but how efficient are they in it is another question. With the help of artificial intelligence, we can cut the learning curve.
- While machines can’t feel emotions, they can learn how to find trigger words and phrases and draw mathematical conclusions from them.
Forecasting The Crypto Market Using AI (Study)
Historically, machine learning has proven to be excellent in making accurate predictions in the stock market, but there were some restrictions with DEX markets.
Why cryptocurrencies are harder to predict?
The reason would be a variety of variables such as technology advancement, market competitiveness, internal pressure, economic challenges, security concerns, political considerations, and maybe most importantly — social media news (yes, we know).
Given their extraordinary volatility, cryptos provide enormous profit potential if pragmatic new strategies are employed. Unfortunately, owing to the absence of indexes, cryptocurrencies are less predictable than typical financial forecasts.
What science has to say when using AI for speculating the market?
A recent study from the University of Coimbra in Portugal examined the predictability of the three big cryptocurencies — Bitcoin, Ethereum, and Litecoin — using machine learning techniques such as linear models, random forests, and support vector machines.
The encouraging findings back up the claim that machine learning offers solid approaches for evaluating the predictability of cryptocurrencies and developing effective trading strategies in these markets, even in bad market conditions.
When prices are decreasing and the risk of extreme negative events is high, the trading method nevertheless shows a positive return after trading costs, indicating that these strategies may hold even under fairly adverse market conditions.
Automated Crypto Trading With & Without AI
Both types of crypto trading bots can differ in the used strategy, so you need to be careful if your chosen service provides the correct tactics.
Without AI
The team of Captainaltcoin perfectly split the algorithm strategies into four categories:
- Arbitrage bots
- Market making bots
- Technical trading bots
- Profile automation bots
With AI
Our team at OneButton Trader, on the other hand, split AI strategies into the following three:
- Risk management AI bots
- Bull market crypto trading bots
- Sideway portfolio maximizing bots
All of which are powered with the best machine learning that’s backed both in literature and backtesting.
Photo Via Unsplash By: Adam Nowakowski
Security When Using an AI Trading Bot
Before picking any automated software for your cryptocurrency trading, there are several questions you need to ask yourself:
1. Is the team trustworthy?
Trusting your money to a trading bot means trusting the team behind the service. You need to gather as much knowledge on their qualifications, practices, and prior results.
Trading, in general, is very risky, and you need to remember that the full responsibility for your finance is on you, so be picky with whom you trust to manage your savings.
Never invest money you aren’t ready to lose!
2. Does the bot trade with the strategy I want?
If you are an experienced trader looking to maximize your trading, be sure the services you choose include a bot that can follow your approach.
Most good crypto trading companies offer some kind of a free trial, so make good use of it.
Demo accounts that trade with virtual money are also helpful for testing the bot’s strategy. An alternative is using a smaller investment like 100–200 US dollars.
An important note is that AI trading bots don’t follow a set strategy like traditional bots. They learn from thousands of days’ worth of data and optimize their strategy to the current market condition.
3. Does the service offer good support and community?
Reliable support and community to discuss the latest methods or technology are crucial. Always check if the service has an active Telegram/Discord community.
4. Is it easy to use, and how much prior knowledge do I need?
Crypto trading automation tools are designed to make your life easier and save you time. If you need to be a software developer to create one (and that is not your profession) then there’re better choices.
The best trading bots are not only effective but have a very good interface that’s easy to use. One of the goals in creating One Button Trader was making crypto trading as easy as clicking one button.
How AI Is Used In Blockchain
We saw that ML plays a vital role when trying to reap maximum gains from crypto trading but can AI improve the whole way Blockchain operates?
Blockchain and AI value correlations
- Authenticity — Combining Blockchain and AI can improve data security.
- Augmentation — AI can process the enormous information in Blockchain while creating a trustworthy and transparent data economy.
- Automation — AI models incorporated in Blockchain smart contracts can process orders more quickly.
AI + Blockchain success stories
- Healthcare — Organizations can collaborate to improve care while respecting patient privacy by storing patient data on Blockchain, including electronic health records.
- Life sciences — AI can process the enormous information in Blockchain while creating a trustworthy and transparent data economy.
- Finance — Speed, low transaction fees, complete privacy, and secure automation process. What else can you ask for from a financial institution?
- Supply chain — Track everything on the supply chain with lighting fast speed, without spending additional resources.
AI & Blockchain Development In The Next 10+ Years
The impact of both technologies is already huge! Artificial intelligence is being heavily utilized in transportation, medical, and cybersecurity, while Blockchain has forever revolutionized finance and isn’t stopping there. Here’s our prediction on how the development will continue:
2022–2025
- NFTs & crypto identities will become mainstream (Did you know that FB is now “Meta”)
- Businesses will rely heavily on AI for making analyses, forecasts & automation tasks
- Cryptocurrencies will become widely accepted, and their use will be even more practical
- Healthcare will see improvement thanks both to blockchain distribution & AI management
- More developers and investors for DeFi projects, crypto trading, will be 60%+ AI-driven
2025–2030
- Blockchain will allocate for $1.7 trillion economic growth (estimate according to PwC)
- Artificial Intelligence will become mainstream, and it’ll be implemented in every business
- Bitcoin to reach up to $400–500k value (prediction by several respectable investors)
- AI will manage 90% of cybersecurity and will help cryptos become the main currency in several countries
- Around 98% of trading volume will be managed by smart AI trading strategies
2030 And Beyond
- We can only imagine what the future holds but it’s safe to say that 10 years from now every single person that lives in a developed country will understand what cryptocurrencies are and how to use them.
- Many traditional professions will be overtaken by machines powered by AI & ML. Opportunities for VR professions will emerge, as the world will begin its march towards virtualization (Yes, the Matrix was a documentary).
- Complete new technologies will be built on the foundation of Blockchain & AI.
Wrap Up
We are experiencing one of the best periods of technological advancements. With the rise of DEXes and DeFi, there’s an increased need for automation which neural network programming seems to fit.
What seemed impossible before in the face of predicting where the crypto market will go now seems a more predictable venture thanks to the AI trading bots that use 100%, ML models.
There is certainly a lot to be learned on these topics, and several pages are hardly enough, but reading this article will undoubtedly build a strong foundation for topics like Blockchain & AI.
Remember to never stop being hungry for new knowledge and to follow the latest news in the digital world. The more you learn today, the easier your adaptation in the future will be!
