The world of crypto and web3 is nothing short of exhilarating. It’s arguably one of the most volatile market conditions we’ve ever seen in modern finance, underpinned by a revolutionary ethos. For many it’s exciting and for some it’s terrifying. Regardless of where you stand, high volatility brings inherent complexity. The more volatile the market is over time, the less viable blockchain powered applications are in the long-term.
Enter AI, which is emerging as a powerful technology across all sectors, least of all as a tool to decipher the complexity of the crypto markets. In this article we’ll explore how AI can help shape a robust crypto trading strategy, regardless if you’re a personal investor or managing a treasury for a DAO.
The Intersection of AI and Crypto
To date, AI has already played a big role in traditional financial markets. From predictive algorithms in different stock markets to automating risk management, the influence of AI is nothing short of transformative. There’s still a lot of untapped potential, but we’d be remiss not to mention the impact it’s already had. Robo-advisors such as SoFi and Wealthfront have been leveraging AI for years already.
In recent years however, AI has entered the realm of crypto assets. From price prediction to automated trading bots, AI is sinking its teeth into a new frontier of finance. Many would argue that web3 provides highly fertile ground for AI. Blockchains are a transparent ledger of transactional data that offer AI models plenty of fuel to grow and learn with incredible speed. The synergies between crypto and AI are undeniable.
Understanding AI in Crypto Trading
At its core, AI models operate based on algorithms that learn from data. The more data, the better the AI model performs. Whether it’s the price history of Bitcoin measured against real world events or the trading volume of ETH, Machine Learning models can absorb these vast datasets and identify patterns in ways human analysts can’t. More complex AI models, such as Deep Learning networks, take it a step further and make predictions or decisions against these patterns, similar to the human brain.
Benefits of Integrating AI into Crypto Trading
It’s probably no surprise that AI can offer incredibly powerful use cases in the crypto markets. But let’s dive a little deeper and explore some specific use cases where AI can boost your trading strategy.
Predictive Analytics
Traders have traditionally relied on technical and fundamental analysis to predict market movements. While these tools hold merit, such analyses become less efficient in the volatile markets of crypto.
Predictive analytics can serve web3 platforms that need improved resource management and capital efficiency. It’s very important for these platforms to remain liquid and help sustain markets. If they get burned by sudden volatility, so do their users.
Risk Management
One of the biggest challenges when you’re trading crypto is managing and mitigating risk. The volatility seems so unpredictable and to a certain extent it is. At least to the human eye. But with a sophisticated AI model with predictive prowess, you can align your strategy against its recommendations to massively mitigate your financial risk.
Automated Trading
Trading bots aren’t a new phenomena. They’ve existed for a long time across traditional financial markets. But integrating the next generation of AI models into trading bots will significantly enhance their capabilities. These bots will be able to make split second decisions based on real-time data, ensuring that traders capitalize on every possible opportunity in the market.
Personalized Insights and Advice
Imagine a world where you have your own financial advisor that works 24/7 and understands your risk appetite and investing objectives down to every minute detail. AI models can be trained to a person’s financial circumstances, trading activity, objectives, and risk appetite and use that data to provide personalized investment advice all hours of the day.
This could help your average person manage their money way more efficiently and help the general population grow their wealth more reliably, taking a large financial strain off society.
Challenges and Limitations
Despite all this opportunity, there are no silver bullets and AI comes with its own limitations.
It’s Priced In
A well respected user on one of Reddits most popular subreddits, WallStreetBets, once shared the following:
“Don’t even ask the question. The answer is yes, it’s priced in. Think Amazon will beat the next earnings? That’s already been priced in. You work at the drive thru for Mickey D’s and found out that the burgers are made of human meat? Priced in. You think insiders don’t already know that? The market is an all-powerful, all-encompassing being that knows the very inner workings of your subconscious before you were even born.”
So naturally the question becomes, if AI is so powerful in a trading environment, won’t it already be priced in? The answer is probably yes, but nobody knows for sure. The next generation of AI is still very early.
Over-Reliance on AI is Not the Goal
We’re still humans that have to make our own decisions. The exponential development of AI could lead traders to become over-reliant on the technology and blindly follow the algorithmically produced advice. This could diminish our critical thinking abilities which is a big problem if the AI model has been fed the wrong data. An AI model is only as good as the data it’s been trained on. Always judge advice from an AI critically.
There’s Always Bad People
No matter how beneficial a technology is, there are always people who will twist it for the worse. This could be market manipulation or influence that has a tremendously negative impact on the status quo. Most of us aren’t data scientists developing our own AI models. That means we’re going to have to rely on others to produce the “financial assistants” of the future. Be wary of what tools you select and who you trust.
Ethical Considerations
In the world of finance, ethics always play a crucial role. With AI’s potential to influence markets, concerns about its role in potential market manipulations arise. Moreover, transparency in AI’s decision-making processes is essential, especially when traders base significant financial decisions on its insights.
We don’t have the answers to this, but blindly following the development of AI without paying attention to this would be a mistake.
Conclusion
In the continuously evolving realm of cryptocurrency, AI emerges as a beacon of truth, guiding traders and institutions through these rocky waters. Whether you’re a seasoned crypto trader or just getting started in the world of web3, understanding and integrating the latest AI technology into your trading or investing strategy could be the difference between completely missing the boat and having a smooth ride across calm waters. In the volatile world of crypto, information is power and AI is your key to harnessing it.
And as always, none of this has been financial advice!
