High-Frequency Trading Made Bitcoin Boring?
The Bitcoin market has been quite slow lately. Some would say a little too quiet. As of July 14, Bitcoin’s volatility levels dropped to levels unseen after 2017. In recent weeks, Bitcoin was left behind as investors piled into altcoins such as Chainlink and Cardano.
One possible explanation for why Bitcoin is consolidating for so long may be an increase in the presence of high-frequency trading (or HFT for short) firms in recent months. Paolo Ardoino, CTO of Bitfinex, believes that HFT is a major reason behind Bitcoin’s volatility.
“Crypto is back to the old days of HFT before everything became the zero-sum game that it became today. HFT crypto firms can make a lot of money by deploying relatively straightforward strategies, such as cross-exchange arbitrage or exploiting the spread between one exchange and another” – Ardoino said.
HFT and cryptocurrency
High-frequency trading is a trading method that uses trading algorithms to transact an enormous number of orders in fractions of a second. While it has existed in the crypto space for a long time, the scope of its existence was rather small. However, just as billionaire Paul Tudor Jones revealed his BTC holdings recently, other institutional investors are showing interest and joining the market. This may explain the greater influence of HFT on the market.
Bitfinex, which claims it is “huge for HFT in crypto,” just recently revealed that between 80% and 90% of its platforms’ volume was now generated by HFT companies. Bitfinex partnered with a company called Market Synergy and started offering “institutional standard crypto connectivity.”
This crypto exchange platform concludes the growing use of HFT represents an increase in “maturity in the crypto space.”
However, why would Bitcoin volatility go down instead of up, with the increased use of HFT? Ardoino explained that, while the volatility is reduced, the liquidity of the market has drastically increased, which is exactly how HFT operates.
“As Bitcoin becomes an established asset class, the high levels of volatility associated with crypto will recede,” he explained. “There is an inverse correlation between liquidity and volatility, especially when HFT is involved.”
Bitcoin is famous for moving aggressively to the upside and downside for a short period of time. If we take a look at the previous year, Tom Lee of Fundstrat reminded everyone that the majority of Bitcoin gains came in the ten best trading days of the year. However, the evergrowing presence of HFT may as well be changing the “rule of 10 best days” as well.