A few days ago the Down Jones, S&P 500, and FTSE fell sharply causing chaos on the Bitcoin market. Cryptocurrencies’ prices fell in unison, some dropping as much as 20%, and the entire market lost approximately $13 billion altogether. Even though there is no direct correlation between the two markets, most people assume that the crypto market’s drop was caused by the fall of the stock market.
However, this assumption falls short of the numerous possible explanations and factors affecting daily market conditions. It has become an accepted notion that market manipulation is part of the problem causing volatility but this is an incomplete understanding of the underlying causes. Besides greed and investor’s sentiments there is one element that is often overlooked when determining market fluctuations: automated trading. In particular the use of trading bots.
Trading bots are computer programs that execute trades triggered by indicators that fall within pre-set parameters. Normally, they serve an important role in assisting traders identify and execute short term trades. Once programmed, they operate independently, faster, and without emotion. Properly supervised and updated to market changes, trading bots can be both beneficial and profitable.
However, malicious bots can wreck havoc on the market and individual investors. In some cases they are responsible for causing flash sales or purchases that many mistake for a valid trend. For instance, in 2014 the Mt. Gox exchange experienced an unexplained surge in demand that raised prices exponentially. Investors bought into the excitement and lost money. It was later discovered that the ‘Wily bot’ was responsible. The same thing happened on November 29, 2017, when abnormal trading of the NEO cryptocurrency led to a 90% drop in price in seconds before returning to its original price.
Then there are the pump-and-dumps bot groups. These groups coordinate operations involving bots and human participants to create massive movements on a target coin. In this case, the groups consist of programmers, hackers, and other group members. They communicate via Telegram or Reddit chatrooms, organize, and coordinate their attacks on their unsuspecting market audience. The result is the same in all instances; the market fluctuates and investors lose money.
Recent examples include the quick succession of prices of VeChain, Nano, Digibyte, Aurora coin, and others in the last 30 days. All unexplained cases with no clear stimulus to justify the push of the prices upwards.
Trading bots are prime catalysts of volatility. Following trading signals, they create large bogus purchase or sell orders that mislead investors and create FOMO. Their activities go largely unnoticed or covered by other events. The media is usually unable to figure out what is really happening until it’s too late. And it usually falls back on alternate narratives in order to provide some kind of explanation to the public. In this week’s case, the media blames the stock market; other times the blame falls on negative statements or low trading volume. Investors should be mindful of this ongoing problem and include it in their analysis of the true nature of future market volatility.