The inherent problem with exotic assets is the fact that they lack trading volumes and contribute to high volatility. Seeing that timely execution of trades and picking up right entry and exit points is a major factor, most traders opt for automated trading in these assets. Bitcoin still in its nascent stages acts like exotic assets with low volumes on the offer. To keep up with the high volatility, Chinese traders have opted for algorithmic trading that has been effective. Let’s dive deep into how automated traders dominate Bitcoin markets and what are the affects:
Why Bitcoin is ideal for automated trading:
Most of the automated trading algorithms work for very short durations of time banking on quick cashing opportunities. In the due process, the algorithms contribute in increasing the trading volumes in the market. What makes Bitcoin ideal for this quick burst short term trading would be low transactional costs as against considerable tick values. The cryptocurrency’s market structure facilitates all possible favorable criteria. This includes arbitrage opportunities across multiple exchanges, almost zero transaction costs on Chinese venues. Also Round-the-clock trading facilities and co-location services make Bitcoin ideal for automated trading arena.
Heavy Chinese domination:
In 2016, China contributed to 96% of the annual trading volumes of Bitcoin. This figure encompasses all three major Bitcoin exchanges from China, namely Okcoin, Huobi and BTC China. Okcoin estimates that automated traders execute 60 percent of the trades on its exchange. On the other hand Huobi and BTC China agree in unison that automated traders execute approximately 80 percent of the trades. With good amount of margins made available on these exchanges along with significant leverage, Chinese exchanges indirectly encourage automated trading. Even non-proponents of the cryptocurrency still indulge in automated trading owing to the host of opportunities available in the market.
Affects on Bitcoin:
While it is indeed true that automated trading increases the volumes associated with the market, it might have a negative impact on Bitcoin trading in particular. These algorithms employed to execute automated trades trigger quickly and easily. Many a times when there is a hint of inconsistency in the market, these algorithms might trigger a flash sale or buying which might not represent the exact market sentiment. In Oil outright markets or other markets with considerable volumes, volumes operated by actual traders/investors counter the flash selling/buying of algorithms. In Bitcoin market, since the algorithms dominate the market scenario, there have been numerous instances of market crashes with little trigger. Famous examples of such cases are the flash sale that led to the Bitfinex crash, recent drop of prices to $750 level from all-time high.
Hopefully with more mainstream adoption, we would be able to witness stability to handle automated trading in good balance.