This year can be likened to the Big Bang for crypto currencies, in May they all exploded onto the scene and inflated into the financial universe at a highly accelerated rate. This has caused exponential growth in the crypto currency market in 2017 which is now worth over half a trillion dollars. With new and old traders jumping on the digital bandwagon the charts often display some wild swings and patters not usually seen in other more stable markets such as forex or stocks.
It would be pertinent to question how much trading is being done by humans and how much do bots control. According to a report in VentureBeat bots may be accountable for a large chunk of short-term holdings. Automated bot traders could be freely manipulating the markets, artificially inflating prices, and causing individual traders to overpay on their executed trades.
Bots are software programs that are designed to trade in short-term markets. They have the advantage of not applying emotion to buying or selling and are triggered by specific events. However they can be held responsible for market crashes such as the notorious Black Friday Wall Street crash in 1987. Bots are all over crypto currency markets and they can be seen in action by looking at historical trading charts. Their purpose is to take advantage of opportunistic moments such as an altcoin or token being pumped by inexperienced investors. Pump and dumps are very common in crypto markets as social media hype is a big influence for newbie traders.
Bots can manipulate pump and dumps by falsely inflating a coin’s price which leads real traders to pay more for the asset, which pushed the price even further causing the pump. Groups of traders have reportedly collaborated in this fashion to use bots which will initiate price inflation. Newbie traders getting their insights from the likes of Facebook instead of real news outlets get a big dose of FOMO (fear of missing out) and jump on the asset which spikes the price even further.
Flash crashes are also a result of bot action; a recent example occurred with NEO on Bitfinex last month. This was caused by bots trading simultaneously causing the price to crash by 90%. Day traders using big margins got seriously burnt, those ‘hodling’ were not affected as the price bounced back up within a few seconds.
As the crypto market expands even further into 2018 we are likely to see a lot more bot action on the charts. Be aware of what is going on and look for the signs when making your trades.