Blockchain already has an advantage with AI, while TradFi took decades.
Trading, whether it is stocks or crypto, is mostly about making the right decisions at the right time to generate positive returns. Each successful Trading decision involves deciding what to buy or sell and establishing the appropriate time to implement an idea.
There are two common methods used for evaluating investment opportunities: fundamental and technical analysis.
Despite the fairly straightforward breakdown of methodology, the analysis methods themselves are anything but simple. Fundamental analysis requires in-depth knowledge of finance and modeling and is therefore primarily employed by financial analysts on the sales side and professional investors. On the other hand, technical analysis requires a strong understanding of mathematical formulas. Traders need to track historical data, keep track of current price actions and develop formulas to predict future price momentum.
In the beginning of cryptocurrencies, it was relatively easy to keep track of prices. This was because there were only a handful of cryptocurrencies and a limited number of exchanges. As a result, traders could easily keep track of price changes and implement thorough technical analysis. Although not exactly practical, it worked well at the time.
Nevertheless, as more investors began to enter the market, the need for accurate price discovery and fair trade became central. Unlike stocks and indices, the crypto market operates around the clock, every day of the year, without market holidays. This, together with the ever-increasing number of cryptocurrencies and exchanges, makes it difficult for traders to track prices, perform technical analyzes and place orders at optimal prices and at the ideal time. However, as more investors began to enter the market, the need for accurate price discovery and fair trade became central.
As a result, many traders are increasingly resorting to algorithmic trading systems to get the most out of their crypto investments. Algorithmic trading, also known as algo trading, is the process of automating the entire trading process using mathematical algorithms and predictive models from historical, social and real-time data for assets to execute buy and sell orders according to predefined parameters.
The emergence of algorithmic trading
Algorithmic trading software works effectively as a personal assistant who works around the clock, and continuously identifies optimal trading opportunities based on initial input. When the current algorithmic criteria are met, the software automatically buys or sells the asset without requiring a user to log in to the exchange and execute the transaction. By design, algorithmic trading systems can execute orders, stand-alone and bulk, with a speed, consistency and frequency that humans cannot match.
Typically, the underlying algorithms reflect complex formulas along with high-level predictive and mathematical models. Building an automated trading system requires technical expertise (coding skills), access to vast amounts of accurate data and a deep understanding of economic and mathematical models. Therefore, it is quite understandable that many traders choose paid, ready-made solutions that can be seamlessly integrated into their trading accounts with just a few clicks.
That said, algorithmic trading, despite its popularity, is limited to some degree. It relies on historical data and real-time data to predict future price behavior. With the growing number of exchanges around the world, each on stand-alone blockchains, it is becoming increasingly difficult to gather accurate data from all available sources. On top of that, most algorithmic trading software only works with blockchains that share similar properties.
AI to the rescue
This is where new technologies like AI (Artificial Intelligence) come into the picture. While the traditional financial industry (TradFi) is still trying to figure out how to leverage AI, AI-powered trading robots have already positioned themselves as next big thing. Compared to existing trading algorithms, AI-powered trading robots, order routing protocols and other new innovations give crypto traders an advantage by supporting high-frequency trading that ensures bulk orders are processed in microseconds.
Unlike conventional trading algorithms, AI-powered trading algorithms do not need to be programmed repeatedly. Instead, AI is designed to operate independently by analyzing vast amounts of data to build unique trading strategies.
In addition, AI trading robots can backtest these strategies across multiple variables and scenarios to further refine options. This allows AI-powered trading algorithms to deliver better results than algorithmic trading systems, especially when trading cryptocurrencies across multiple exchanges.
Take FLUID, for example. It is an AI-based smart order routing protocol that doubles as a liquidity aggregator across chains. Utilizing blockchain technology and AI, FLUID offers almost instant pricing and cross-chain settlement, along with extremely low costs, high throughput and zero counterparty risk.
