Can You Trade Crypto Using AI?

TL;DR

Advanced AI systems can analyze an asset's trading history and make accurate real-time trading decisions
The accuracy of AI predictions relies on the quality of the data provided, and human error in dataset preparation can impact performance.
AI trading bots offer several advantages, including emotion-free trading, efficient recognition of market patterns and 24/7 trading capability.
Current AI trading tools have limitations in adapting to changing market conditions, particularly during unpredictable events.

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Introduction

With tools like ChatGPT gaining popularity by the day, more and more people are using AI in their day-to-day lives. The logical question that follows is: how can AI help me in my trading?

As crypto markets run 24 hours a day, 7 days a week, it can be challenging to keep up with everything. With the rise of AI-driven tools, some people look towards AI to help them stay in tune with the market. From performing technical analysis to diving into an organization’s financial reports – chances are there is an AI being developed for it, or one already in use.

But before jumping to the technical side, let’s discuss some basics!

What Is Artificial Intelligence?

AI has a long-standing history – with famous mathematician and computer scientist Alan Turing pushing over the first domino in 1950, by publishing his paper “Computing Machinery and Intelligence”. In this paper, he raises a simple question that went on to become the basis of AI research in the decades that followed: “Can machines think?”

Fast forward to the present, OpenAI’s language model, ChatGPT, defines AI as follows: “AI (artificial intelligence) is the development of computer systems to perform tasks that would normally require human intelligence.”

In other words, AI is where advanced computer systems try to emulate human intelligence as closely as possible. Speech recognition tools or automatic slideshow design tools in PowerPoint are basic examples of this, but it can go a lot further.

How Does Artificial Intelligence Work?

Artificial intelligence generally works by feeding significant amounts of data to algorithms. The algorithms will process all this data and derive insights from it, which is used to generate future output.

For example, if you feed AI millions of images, along with descriptions of what is in the image, it will eventually be able to describe new images with surprising accuracy. This is why CAPTCHA tests are constantly evolving to generate more complex questions to prevent AI from beating these Turing Tests.

How Will ChatGPT Impact Crypto?

ChatGPT has gained immense popularity since its recent launch, with an estimated 173 million users in April 2023. Its popularity is further enhanced by its ability to learn and adapt to user behavior, making it incredibly versatile, with many third-parties applications based on ChatGPT. It has also been featured extensively in the media, highlighting its growing influence.

Since the launch of ChatGPT by OpenAI, crypto assets with a focus on AI has surged in valuation, causing an AI narrative in early 2023, with tokens like GRT, AGIX, FET and more rallying.

Additionally, ChatGPT has recommended high-growth cryptos to buy, indicating its potential to influence investment decisions. The extent of ChatGPT's crypto impact remains to be seen as the AI tool has only recently launched.

What Is AI Crypto Trading?

AI trading is the word that is usually used to describe algorithmic trading or trading bots. Many of these ai crypto trading bots operate using a set of parameters. A great example of this is a grid trading bot.

These algorithmic trading bots are getting more advanced over time, progressing from simple grid trading bots to full-on automated systems that can understand and execute a defined trading strategy, and even optimize it when the market conditions require it to.

Most of these advanced AI trading algorithms are not available to the public though, as they have been developed for hedge funds or other large financial institutes.

Can AI predict the Markets?

While the common AI trading tools, such as DCA bots or grid trading bots, lack the ability to predict where the market goes next, the more complicated AI systems have advanced enough to be able to predict market movements with surprisingly high accuracy.

Because AI can process the entirety of an asset's trading history, it can familiarize itself with its behavior far better than any human ever could. With this data, it can make real-time trading decisions or make predictions based on the direction of the market.

Can Artificial Intelligence Trade For You?

AI has been able to successfully predict market direction and perform analysis on the markets (not financial advice). However, as many traders find out sooner than later, determining the direction of the market right is the easy part. Turning that idea into a profitable trade is where it gets difficult.

While AI doesn’t have the same emotional decision-making challenges you and I have to deal with, it still has a long way to go. Because AI operates with the data it is provided, humans still prepare the dataset, a task that is prone to (human) error. With faulty data, AI will not be able to make correct predictions.

Therefore, it is incredibly important that AI developers conduct proper testing on their trading bots, their rules and instructions before deploying them. In this testing phase, many issues can be identified, issues that would have caused financial losses if they were only identified when the AI is already deployed.

Moreover, while it is relatively easy to provide parameters for risk management, AI struggles to use these parameters in a way that makes sense considering the volatility. After all, the behavior of markets changes over time. AI still needs to develop further to be able to adapt quickly to the constant market developments.

Is AI Trading Profitable?

As discussed, AI relies completely on the data it is provided and the parameters it is given to operate within. As a result, AI trading can theoretically be profitable if it is developed well and has been given a dataset of high quality.

Nevertheless, most of the AI-based trading tools available to the public are limited in their applicability – so far. There is no question that AI tools are becoming more powerful by the day, and it is only a matter of time before a profitable trading AI bot is released to the public. Until then, those technologies are controlled by the dominant players in financial markets.

Benefits of Crypto AI Trading

Assuming you have access to an AI trading bot, operating with a reliable dataset and well-defined parameters, AI trading can yield significant benefits. Firstly, an AI is able to trade without the emotions that come with high volatility. As a result, these trading bots can execute strategies more clinically than humans, generally resulting in more consistent performance.

Moreover, AI can process a lot more data than any human could. This gives it a clear advantage over human traders. For example, it can recognize certain market behaviors and patterns and react to them far more efficiently, and faster too! This speed advantage is significant. This means it can react to market moves faster and enter a trade before a human even figures out what happened.

AI can also help traders perform back-testing analysis. Not only can you use it to perform trades, but traders can also decide to leverage AI in order to improve their current manual trading system.

Additionally, a well-developed AI trading system can be used even by someone with little trading experience. Envision a future where beginner investors could invest capital in an AI with a proven track record of consistent returns, similar to today’s copy-trading solutions.

Finally, an obvious benefit to bot trading or AI trading is that these computer systems can run 24 hours a day, 7 days a week. This allows traders to never miss a minute of price action.

Limitations of Crypto AI Trading

While the application of AI technology in financial markets is promising, the currently available tools are limited in their applicability. For example, the behavior of markets changes over time, and the current AI trading tools generally struggle to adapt to these changes.

A perfect example of this lies in black swan events. During these events, emotions control the market, something an AI struggles to wrap its head around. Therefore, further development is needed to prepare AI trading systems for these constantly changing market conditions.

Another drawback lies in the development stage of AI. The decision-making algorithm operates based on the data that is provided to it, which makes it incredibly important that the data is reliable. As it stands, this data preparation is done by humans, which means even a well-developed AI is not immune to human error. The dataset can make or break an AI trading system.

Finally, AI has a significant hurdle around trust to overcome. The public is skeptical towards artificial intelligence, and some even go as far as saying we are better off killing the innovation while we still can. AI trading bots will have to build a track record of consistent performance in order to win the trust of the public, a process that can take years.

Closing Thoughts

All in all, AI is a technology still in its infancy, but we’re already seeing the impact it is making. It can accurately predict the direction of markets and can make trading decisions at much faster speeds than humans can. Well-developed AI systems can process data far more efficiently than the human brain, giving it a clear edge.

AI still has a way to go before it can fully compete with human traders and investors, but we should pay close attention to it, as developments are happening incredibly fast.

Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form. Please do your own research.

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