In cryptocurrency trading, AI is being incorporated in several different ways. There are now trading bots powered by AI-based applications such as ChatGPT, investment portfolios compiled by AI bots, and market forecasting contests.
Bots for trading
Trading bots can be hosted on cryptocurrency exchanges or integrated with exchanges via application programming interfaces (APIs).
A bot is typically used for short-term trading, and a trader can set it up to follow a specific strategy by watching for specific patterns in the available data. However, crypto bots can implement dollar-cost averaging (DCA) into long-term investments, which are generally less risky but also much simpler.
With ChatGPT, traders can create computer code for specific trading strategies on certain exchanges, including Binance, such as momentum trading Bitcoin. This gives ChatGPT new functionality to trading bots. Additionally, it will explain the source of the pricing data and which parameters in the code need to be adjusted.
Crypto trading bots such as Omni, which runs on the Solana blockchain, have been trained to implement passive decentralized finance (DeFi) strategies with on-chain data.
Integration of social media
It is already possible for users to copy the trades of other traders they follow using “social trading features” on some trading platforms. AI can take this one step further by continuously analyzing sentiment from social media platforms such as Twitter and Reddit, where cryptocurrency traders are most active. In this way, it can make trading decisions based on whether the market sentiment is bullish or bearish.
The social investing platform eToro has introduced an AI-based cryptocurrency trading feature that pulls in all relevant tweets about specific coins and tokens from Twitter.
The ability of AI to synthesize massive volumes of data and identify complex patterns makes it better suited to predicting highly volatile cryptocurrency prices than human analysts.
In order to predict future price trends, users can use a machine learning algorithm based on historical prices, trading volumes, market sentiment, macroeconomic indicators, and other market influences. Traders can use these insights into potential future price movements to inform their trading decisions. However, even the most complex AI models still make mistakes sometimes, so trade at your own risk.
Management of risks
In order to build and rebalance their portfolios, investors and traders can utilize artificial intelligence to assess the risks associated with investing in different cryptocurrencies. For instance, Coinbase, the largest US-based cryptocurrency exchange, is testing ChatGPT to assist its risk analysis to screen coins or tokens before listing them for trading.
Investors may soon be able to use AI applications like ChatGPT to determine whether a coin or token is an appropriate risk based on their age, portfolio, size, and investing goals.
To help traders and investors allocate their funds, AI tools like ChatGPT can create cryptocurrency portfolios based on their pricing and risk analysis.
A blockchain's behavior and performance can also be assessed by AI by analyzing transaction data, user information, and contact details. By doing so, traders and investors can identify which blockchains and native cryptocurrencies are being adopted most frequently and which have potential threats and vulnerabilities.
Even ChatGPT, one of the most impressive AI models ever created, has a tendency to make mistakes, a phenomenon known as AI hallucinations.
Trading Automation Powered by AI
In automated trading, a computer program executes trades based on preset criteria on behalf of the trader. By removing the influence of emotions on trading decisions, traders are able to avoid panic or become overconfident, which can lead to irrational trades. This makes trading more efficient and minimizes human interaction.
By learning from data and adapting to new information, AI-based trading bots can help traders make more informed trading decisions. AI-based trading bots can incorporate reinforcement learning, machine learning, and deep learning in various ways.
Using historical datasets, machine learning trains an AI algorithm to predict what future data will look like;
In deep learning, neural networks are used to learn from data and make predictions;
The reinforcement learning (RL) method trains AI algorithms to make correct decisions by rewarding them for good decisions and penalizing them for bad ones.
An algorithm can be backtested after it has been trained to collect and analyze data to ensure it makes the right decisions about past data and is reliable enough to forecast future prices.
If the AI algorithm predicts that bitcoin's price will rise, it can execute a trade to buy a specific quantity of bitcoin. It can execute trades based on its price predictions. In the event that bitcoin's price is predicted to fall, it can sell all or part of the position.
AI Sentiment Analysis: How It Works
AI can quickly process large volumes of data, making it especially useful for analyzing market sentiment about crypto coins or tokens on social media platforms, news websites, forums, and blogs.
Natural language processing can be used by AI algorithms to identify whether the content of these sources is positive or negative.
The sentiment analysis enables traders to determine whether most participants are bullish, bearish, or neutral and gain insight into the overall market attitude. Often, sentiment affects prices in ways that are not apparent from technical analysis alone, as it reflects market fundamentals.
Using artificial intelligence, a large number of positive references to a cryptocurrency would indicate bullish sentiment, whereas a large number of negative references would indicate bearish sentiment. Trading decisions can be influenced by the algorithm's sentiment score, which is calculated based on data analysis.
Cryptocurrency trading tools based on artificial intelligence
Artificial intelligence-based tools are increasingly being developed for monitoring the market and identifying opportunities in real time. Cryptocurrency exchanges, open-source software repositories like GitHub, and AI marketplaces will increasingly offer trading bots as technology advances.
Users can create and monetize AI-based services on SingularityNET's marketplaces, including bots for market analysis;
Using artificial intelligence, TensorCharts provides live market data visualization for cryptocurrency traders;
The Cryptoindex platform provides AI-based analytical tools, such as an index that tracks the top 100 cryptocurrencies by market capitalization and rebalances constantly;
A crypto trading platform called Kryll.io allows users to create or rent bitcoin and altcoin AI bots to automate their trading;
In addition to analyzing sentiment on cryptocurrencies, HypeIndex analyzes sentiment on stocks, allowing traders to act ahead of market movements.
Cryptocurrency Trading: 3 Tips for Using AI Tools
As with any form of investing, there are some precautions you should take when using AI algorithms to trade and invest with real money.
Before finalizing trades or investments, you should always verify the accuracy of the information. AIs make mistakes too!
Rather than blindly following whatever AI outputs, you should use AI trading tools as part of a broader investment strategy that includes fundamental and technical analysis.
It is important to be aware of security risks when using AI tools. As with any online application, AI tools can be subject to malicious attacks and other security risks. Using secure tools from reputable sources is important. Some trading bot platforms misrepresent how effective or how risky their AI tools are.
Utilizing AI tools to enhance your trading and investment strategies and avoid unnecessary losses is possible if you follow best practices for trading and investing.
In a nutshell
As traders use artificial intelligence to inform their decision-making and enhance their trading strategies, it can analyze large amounts of data, forecast market movements, and detect potential risks. As AI technology develops, more sophisticated tools will continue to be developed for automated trading, sentiment analysis, and risk management.
The use of AI-based tools can assist traders and investors in limiting their losses. It is important to keep in mind that AI-based tools should be used in conjunction with other forms of analysis, not as the only source of information.