The cryptocurrency market has grown exponentially this year, with a current market cap of $440 billion at time of writing. The largest cryptocurrency is, of course, Bitcoin, which has gone up 1,500 percent year to date and trades a daily notional value of over $10 billion. But how much of this trading is attributed to real, human buyers, and how much of it is automated?
As it turns out, bots may make account for a large part of short-term holdings. Worse, bot trading could be freely manipulating the market, artificially inflating prices and causing individual investors to overpay on their executed trades.
What is a bot?
A bot is an automated trader that buys and sells automatically, usually in the short-term market. Because bots are preprogrammed, buying and selling without emotion when certain triggers happen, they are historically responsible for dramatic market crashes. The famous 1987 Black Friday Wall Street crash, where equities dropped over 30 percent in one day, was caused by program trading — the first generation of bots, which sold stocks automatically when they fell below a certain price.
Today, bots have become ubiquitous and are certainly not limited to the equities market. In the equities world some bots (commonly known as high frequency traders) are in fact welcomed because they provide liquidity to normal buyers and sellers of equities. But in the cryptocurrency world, not all bots are created equal, and many are not there to help you.
Bots and cryptocurrency: A perfect pair
Bots — ones much more advanced than those that caused the 1987 equities crash — infiltrated cryptocurrency nearly as soon as it began picking up steam. They are now prevalent across all cryptocurrency exchanges as individuals with programming skills look to take advantage of an opportunistic situation: an exploding market, a rush of relatively inexperienced investors looking to capitalize on that market, and little government regulation.