Algorithmic trading is not a new concept, but with the rise of Artificial Intelligence (AI), it is becoming even more prominent in the financial markets. AI is well-funded and has captured the attention of the public, often being associated with get-rich-quick schemes. While AI’s use in trading is still limited, it has the potential to significantly change how crypto trading occurs globally and attract new investors to the market.
AI trading algorithms can create self-reinforcing cycles and pose risks in the financial markets. However, established markets have tools like circuit breakers to halt trading when algorithms go wild, which is not yet the case in the cryptocurrency markets. The lack of gatekeepers in the crypto markets allows AI trading tools to potentially make huge profits or cause significant losses for traders.
The concept of reflexivity explains how money creates self-reinforcing cycles and can create reality. This is evident in the meme-stock phenomenon, where speculation led to increased financial position for companies like Gamestop. In the world of cryptocurrencies, there are thousands of tiny tokens that can be pushed up by AI trading tools based on price action alone.
AI trading bots have the potential to create massive rallies in small tokens, leading to a double bubble in the crypto markets. The first bubble would be related to the bots themselves, with a rush to capitalize on the technology, flooding the market with get-rich-quick bots. The second bubble would form in tiny tokens, as AI bots drive up prices in thinly traded tokens.
The question remains whether any valuable innovations will come from the use of AI in the cryptocurrency market. Only time will tell.
