Algorithmic trading in general and algorithmic trading in crypto are not a new thing, but recent advances in artificial intelligence are taking it to a new level of accuracy and depth. Machine learning in crypto markets has allowed traders to maximize its benefits, such as blockchain data transparency and the lack of regulatory restrictions on high-frequency trading.
Today, we’ll take a closer look at exactly how automated crypto trading with AI is changing traditional crypto trading. Let’s understand the differences between AI vs manual crypto trading with classic bots, what are the benefits of AI in crypto trading, and more.
How AI is Revolutionizing Crypto Trading
The strength of AI is that it can process a large amount of diverse data simultaneously, taking into account multiple factors that classical scripts for trade automation do not consider fully.
And yet, to increase accuracy and minimize the possibility of errors, which modern AI systems are still prone to, their architecture can be broken down into several levels. Each of them is tuned to work most effectively in a certain time range and with the priority of its indicators.
For example, at the microsecond range, AI algorithms can analyze the structure of market orders and identify trading patterns in large players through cluster analysis of transactions. More specifically, AI algorithms build graphs of interactions between addresses and identify clusters of connected large wallets, capture flows between them, and predict volatility spikes based on the activity of whales and institutional investors.
It can also be complemented by a separate architecture for analyzing cross-chain data to identify market trends. This allows for adjustments between different blockchains, analyzing the volume and nature of cross-chain transactions, capturing capital flows between ecosystems, identifying more global market trends, and building diverse and grounded trading strategies.
Machine Learning in Crypto Markets
To be technically accurate, let’s see which modern ML models enable this because not all of them handle data in the same way. As a rule, there is a combination of several models at different levels because each of them is better able to handle different data types due to its structure.
At the lower level, some use convolutional neural networks (CNNs) for their distinctively good ability to recognize visual data and find patterns in it, which is especially valuable in recognizing patterns in visualized bid stack data and price charts.
At the middle tier, many use recurrent networks with an attention mechanism, particularly their notorious Transformer architecture, invented by Google and made ChatGPT possible. Such neural networks can perform well in simultaneously analyzing complex market data such as price trends, trading volumes, various blockchain metrics, and market sentiment.
The top tier is often different types of neural networks, but utilizing deep reinforcement learning (DRL). This makes AI-powered trading algorithms more adaptive and efficient in dynamic market conditions and prevents the degradation of neural networks.
However, much at this level depends on the choice of reward function, and the parameters for this. These may include:
- Risk-adjusted returns (Sharpe ratio, Sortino ratio)
- Maximum drawdown metrics
- Transaction cost analysis
- Portfolio diversity measures
Additionally, there is a problem of non-stationarity of market data, for which there are several adaptive learning methods:
- Sliding window training with dynamic window size
- Adversarial training to increase the robustness of models
- Ensemble methods with dynamic model weighting
- Online learning with regularization to prevent catastrophic forgetting
AI Trading Bots for Crypto
Of course, all this technical side is not the concern of traders and is provided in the form of ready-made solutions for automated crypto trading with AI. Such solutions are trading bots, but the difference between their classic versions and AI trading bots for crypto trading is great.
Often, the best AI tools for cryptocurrency trading are already established solutions with solid approaches and rich integrations, and who recognized the potential of AI in time and managed to implement it. If you are just starting to automate your trading, or on the contrary, you want to choose an advanced solution – learn more about the Best Crypto Trading Bots for Beginners and Professionals.
But if you are already a little familiar with classic bots, you already know that they are pre-defined scripts for automating strictly defined actions in case of a limited number of factors. Simply put, they analyze only pre-scripted data in a prescribed manner and directly perform the appropriate actions.
AI trading bots are more complex, and based on the mechanisms we described above, they implement a multi-level decision-making system, where each level is optimized to solve specific problems of a certain range and correlates its results with the rest.
AI trading bots are also complemented by customized metrics and various risk management systems. For example, various metrics adapted for the crypto market, such as Value at Risk (VaR) to account for extreme volatility and ‘fat tails’ of the distribution of crypto-asset returns, analysis of systemic risks from interconnected cryptocurrencies, and the possibility of cascading liquidations in the derivatives market.
Additionally, speaking of the best AI tools for cryptocurrency trading, the same applies to many platforms that not only allow the integration of third-party bots but also offer their own. They are already equipped with AI-powered trading algorithms and offer it as a seamless all-in-one solution with additional security measures and features. Among such platforms are the well-known ByBit, and others you can read in detail in Best Crypto Exchanges for Bot Trading.
Speaking of additional benefits, use the link and get a welcome bonus on ByBit – one of the most advanced and secure crypto exchangers with rich functionality and convenient design.
Benefits of AI in Сrypto Trading
Processing Speed
AI algorithms can process millions of transactions per second and respond to changes far beyond human capabilities, elevating high-frequency trading. Of course, AI algorithms have their limits, but they are constantly moving, and AI evolution is happening disproportionately faster than human one.
Emotional Resilience
Perhaps AI algorithms will also start to feel emotions, but at the moment, they are not subject to emotional decisions, unlike humans. AI algorithms make deep and complex calculations, and even though errors are possible due to the imperfection of technology, they do not include greedy buying or fearful sales.
Big Data Analytics
AI algorithms can actively operate on huge amounts of data and take into account hundreds of factors. Again, the quality of processing this data strongly depends on the architecture and customization of the AI system. But compare this to a human being who, according to some recent studies, can consciously operate on no more than seven factors, and the rest are stored and processed subconsciously, expressed in intuition, the correct interpretation of which is a separate task.
Non-Stop Trading
Crypto markets, unlike classic stock markets, work 24/7, and AI trading bots don’t need sleep, get tired, and get distracted. This combination makes trading literally constant and uninterrupted, except for some service or hardware issues.
Future of AI in Cryptocurrency
AI Models Improvement
AI models are improving, and their improvements are accelerating, while the cost of training is decreasing. This indicates that all aspects of the AI industry are becoming more efficient, which could potentially make their use in crypto trading even more accurate and profitable.
Decentralized AI Networks
Blockchain is emerging as an ideal infrastructure for AI because of its open data, decentralized structure, and agentless approach. We could likely see even tighter integration of AI and blockchain, and more applications in DeFi for automated liquidity management, asset management, and many other aspects.
AI vs Manual Trading
AI has already revolutionized approaches to trading and brought automation to a new level. It is likely that this automation, as well as its efficiency, will be applied more and more widely and show itself better, replacing manual trading and providing more advanced tools for building hybrid and AI crypto trading strategies.
Conclusion
AI in cryptocurrency trading is not just a hot trend, but a key element in adapting to highly competitive, extensive market data and enormous market factors.
Moreover, these technologies have a great potential to work together and their development is very clearly enriching each other, becoming key technologies of the 21st century and changing fundamental aspects of economics and politics.
However, it is always worth remembering that the development of technology suggests that it is not perfect, and probably never will be, so don’t put everything on it. Human intuition and each individual’s unique experience remain valuable, and the responsibility for your investment decisions always remains on you, regardless of how advanced the tools you have.
Disclaimer: The information provided in this article is for informational and educational purposes only and does not constitute financial, investment, or trading advice. Any actions you take based on the information provided are solely at your own risk. We are not responsible for any financial losses, damages, or consequences resulting from your use of this content. Always conduct your own research and consult a qualified financial advisor before making any investment decisions. Read more
