Blockchain already has an edge with AI, while TradFi took decades to achieve.
Trading, whether in stocks or crypto, is all about making the right decisions at the right time to generate positive returns. All successful The business decision involves determining what to buy or sell and establishing when to execute an idea.
There are two common methodologies applied to the evaluation of investment opportunities: fundamental analysis and technical analysis.
Despite the rather simple breakdown of the methodologies, the analytical methods themselves are anything but simple. Fundamental analysis requires in-depth knowledge of finance and modeling and is therefore mainly used by sell-side financial analysts and professional investors. On the other hand, technical analysis requires a solid understanding of mathematical formulas. Traders should follow historical data, keep tabs on current price action, and devise formulas to predict future price momentum.
In the early days of cryptocurrencies, it was relatively easy to track prices. Indeed, there were only a handful of crypto assets and a limited number of exchanges. As a result, traders could easily keep tabs on price changes and implement in-depth technical analysis. Although not really practical, it worked well at the time.
Yet, as more and more investors began to enter the market, the need for accurate price discovery and fair trading took center stage. Unlike stocks and indices, the crypto market operates 24 hours a day, every day of the year, with no holidays. This, coupled with the ever-increasing number of crypto assets and exchanges, makes it difficult for traders to track prices, perform technical analysis, and execute orders at optimal prices and at the perfect time. However, as more and more investors began to enter the market, the need for accurate price discovery and fair trading took center stage.
As a result, many traders are increasingly turning 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 of assets to execute buy and sell orders according to predefined parameters.
The rise of algorithmic trading
In effect, algorithmic trading software acts as a personal assistant that works around the clock, constantly identifying optimal trade opportunities based on initial input. Once the applicable algorithmic criteria are met, the software automatically buys or sells the asset without requiring the user to log into the exchange and execute the trade. By design, algorithmic trading systems can execute orders, single and bulk, with a speed, consistency, and frequency that humans cannot match.
Usually, the underlying algorithms reflect complex formulas combined with high-level predictive and mathematical models. Building an automated trading system requires technical expertise (coding skills), access to huge amounts of accurate data, and a deep understanding of financial and mathematical models. Therefore, it is completely understandable that many traders opt for paid, out-of-the-box 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 and real-time data to predict future price behavior. With the growing number of exchanges around the world, each on standalone blockchains, collecting accurate data from all available sources is becoming increasingly difficult. Additionally, most algorithmic trading software only works with blockchains that share similar characteristics.
AI to the rescue
This is where emerging technologies like AI (Artificial Intelligence) come into play. While the traditional finance industry (TradFi) is still trying to figure out how to harness AI, AI-based trading robots IA have already positioned themselves as the next big thing. Compared to existing trading algorithms, AI-based trading bots, order routing protocols, and other innovative innovations give crypto traders an edge by supporting high-frequency trading that ensures that Bulk orders are processed in microseconds.
Unlike conventional trading algorithms, AI-powered trading algorithms do not need to be programmed repeatedly. Instead, the AI is designed to operate independently by analyzing huge volumes of data to create unique trading strategies.
Additionally, AI trading bots can test these strategies on multiple variables and scenarios to further refine the options. This allows AI-based trading algorithms to deliver better results than algorithmic trading systems, especially when trading crypto assets across multiple exchanges.
Take, for example, FLUID. It is an intelligent AI-based order routing protocol that also serves as a cross-chain liquidity aggregator. Leveraging blockchain technology and AI, FLUID offers near-instantaneous pricing and cross-chain settlements, combined with extremely low costs, high throughput and zero counterparty risk.