Guides and Tutorials
August 13, 2021

Artificial intelligence for Cryptocurrency Trading

Single Broker Academy

Nowadays, cryptocurrency trading is a very popular way of making profits. If just several years ago only risky investors put their money in cryptocurrencies, now even newbies want to try their luck on the crypto market.

Nowadays, cryptocurrency trading is a very popular way of making profits. If just several years ago only risky investors put their money in cryptocurrencies, now even newbies want to try their luck on the crypto market.

As the number of cryptocurrencies and traders moves up, market liquidity grows and volatility increases, but the possible profit also rises. How to catch favorable moments to enter the market? How to analyze large amounts of data and be the first who sees signals and opens trades? Artificial intelligence is here to help investors raise the accuracy and speed of their trades.

How to Apply AI to Crypto Trading

Around ten years ago, programs could manipulate cryptocurrency prices. Let us remind you of the Willy and Markus bots blamed for manipulating Bitcoin prices in late 2013. Since then, such operations have become impossible. And now, AI programs are used only to help investors obtain higher profits from cryptocurrency trading.

Artificial intelligence can be used for various aims. The primary purpose is to ease a trader's life and increase the profitability of trades. Let's discover how to use AI for accurate price predictions, market sentiment analysis, automated trading, and investment insights.

Price Predictions

Although the crypto market provides excellent income opportunities, it hides higher risks than even a volatile stock market. High volatility is associated with cryptocurrency decentralization, a lack of certainty regarding the cryptocurrency nature (in some jurisdictions, it's classified as an asset, in others as a good or service).

However, the broader cryptocurrency acceptance by leading banks and financial companies, including JPMorgan, Goldman Sachs, Visa, and Mastercard, attracted additional interest from investors and traders. Cryptocurrencies look less dangerous when big names change their attitude to them.

That's why more and more investors enter the cryptocurrency market. A greater number of traders creates additional challenges, as it becomes more important to find a signal to open a position faster. If many other traders enter the market before you, the price will immediately skyrocket, and you will lose a chance for a profitable trade.

Artificial intelligence provides accurate data analytics, helping investors predict vital market movements. AI enables collecting, cleaning, processing, and analyzing data that is used to obtain valuable insights into a crypto market.

Historical data is a key element for trading on any market, including Forex, stocks, and cryptos. Developers create various forecasting models that analyze historical rates and offer future price predictions.

It’s worth mentioning that AI is often combined with blockchain. Blockchain records not only transactions but also anything of value. As blockchain makes it possible to store and share data safely, AI can analyze historical and real-time blockchain data for providing market insights. Blockchain info can disclose behavioral patterns, uncovering information about market drivers.

A robotic advisor is a common tool that uses embedded mathematical algorithms to generate trading signals. Robots can consider not only the current market situation but also a trader's funds, strategy preferences, and risk levels.

Measure Market Sentiment

Market sentiment is a vital part of cryptocurrency movements’ analysis. As the market is decentralized, news about crypto acceptance and regulation affects the currency value a lot. Thus, it’s important to understand how the market reacts to certain events. AI and natural language processing are applied to analyze the opinions of market participants about a certain event.

It’s a well-known rule that a positive market sentiment pushes the price up, while a negative mood pulls the asset’s value down. To predict market sentiment, you need to follow the news. If a country’s authority or a large company accepts a cryptocurrency as a means of payment or increases its usage, the value of such cryptocurrency will increase. At the same time, when new restrictions are applied, a crypto asset’s price will move down.

However, it’s not easy to follow all the news happening during the day. If trading is your main activity, you can spend hours in front of a screen and may succeed in gathering crypto news. Still, there is a high risk of missing some events.

AI is used to gather, process and analyze lots of data, including news, articles, social posts (we all know how Tweets from Elon. Musk boost crypto prices), forums, etc. When AI combines sentiment identifiers and data, investors get insights and base their further steps on the received information.

AI models process data from the Internet and blockchain to form a verdict on whether market sentiment is positive, negative, or neutral. Yes, neutral sentiment is also important knowledge that prevents you from entering the market with the lack of clear signals. AI and machine learning are even able to catch unusual behaviors to determine manipulations.

Here are types of sentiment analysis:

  • Polarity: this type of analysis is used to evaluate statements and define their sentiment. It helps investors not only see the sentiment of the given statements but also make a scale of similar statements for future analysis.
  • Tone/emotion: it's even possible to analyze the tone of the text. If the news has a negative tone, AI will determine it as a sign to sell a cryptocurrency.
  • Aspect-based sentiment analysis: this type classifies data by a specific cryptocurrency and determines the sentiment assigned to each one. For example, AI can evaluate reviews and comments from traders and associate them with a crypto asset.

Trading Strategies

This method of AI usage can be called the most popular one. Trading strategies are used by traders on any market to define the perfect entry and exit points. As the crypto market is highly volatile, it’s vital to catch a perfect entry signal to earn more and brilliant exit points to earn not less than you could.

Automated trading strategies serve to find the best entry/exit points and execute the trade as soon as possible. A position can be opened and closed without a trader; it’s enough to set some criteria that should be met for a position execution.

High-frequency trading is a kind of algorithmic trading. It’s applied to execute orders within fractions of a second. It’s a popular tool among investment and hedge funds. The algorithm uses mathematical computation data and predictive analytics to forecast market movements and execute trades rapidly.

There are also financial algorithms that offer accurate analysis to make the best trading decisions.

Clean the Data

It’s the easiest way to use AI in cryptocurrency trading. To make decisions and find signals, a trader should observe a lot of data. It would be better if the data were structured. Traders like to say, “remove the market noise”; here, the AI removes data noise. A trader should have only relevant information that will help to catch a signal.

AI is used to create models that choose only useful information for a trader. It allows building models that classify information by the currency name, document type, currency founder, etc. Such data is usually structured and provided on a user-friendly interface.

AI in Trading: Use Developed Methods or Rely on Traditional Approaches

Although we are sure that AI helps improve trade profitability, there might be people who prefer traditional trading methods. Check the pros and cons of AI implementation in trading activities and decide whether it’s your approach to crypto trading.

Why You Should Use AI in Crypto Trading

  1. Fast pattern recognition. To identify a pattern on the price chart, a trader needs to apply several indicators and tools. At the same time, robots can do that within a second. It allows entering the market fast.
  2. Automate trade execution. You don’t have to be in front of a monitor 24/7. A robot can execute a trade as soon as certain parameters are met.
  3. Trade without emotions. Any trader, despite their experience, is a human being that can be tired and stressed. It affects the quality of trades. Plus, every person wants to earn more, and sometimes, it’s difficult to exit a trade if it’s profitable. AI doesn’t have feelings.
  4. No mistakes. Human beings make mistakes while robots don’t. If you set certain settings, a robot will execute your trades accordingly and without errors.
  5. Examine trading ideas. AI allows testing various trading ideas on historical data or with Paper Trading.
  6. Trade numerous assets with limited time. AI enables methods to clean and classify data, so you get only useful information.

Why You Should Not Use AI in Crypto Trading

  1. Mistakes are possible. Although people make more mistakes than robots, the risk of mistakes can’t be excluded from AI technologies. As computers can break down, robots can too.
  2. Trader’s participation. Although AI enables automated trading, a trader should monitor, adjust, and maintain its work.
  3. Choose wisely. Of course, not all AI projects work well. It’s important to choose high-quality, reliable bots based on reviews and personal experience.
  4. No guarantee. There is no guarantee for profits - no matter what bot you use. Trading depends on many factors that can change the conditions immediately. Avoid those programs and bots that promise enormous earnings.

Final Thoughts

AI trading offers useful assistance for traders, especially on the cryptocurrency market. High volatility, as well as a large number of traders and cryptos, creates challenges - especially for newbies. AI methods allow automating trades, executing trades more efficiently, and avoiding human beings’ risks such as emotions, mistakes, and limited experience.

Single Broker provides advanced tools for trading and analyzing public data for various assets. Real-time data allows users to track order books and trade history on any given exchange.