Several technological trends have emerged in recent years. Artificial intelligence is a hot topic these days. Just like in Hollywood movies, AI serves as the human’s dependable robot assistant. Many duties are being entrusted to it, and AI is making an impact across multiple industries. One of the primary areas where AI is making a difference is in financial markets. For example, if you are a Bitcoin trader, you can employ AI-powered tools to improve your performance. Yet, other than trading, there are several different effects AI might have on the crypto market in the near future.
In the following article, we briefly describe how AI generally affects cryptocurrency. We begin by outlining the benefits of combining blockchain and AI. The next step is to discuss how AI technology may benefit the cryptocurrency industry, particularly with regard to its effects on cryptocurrency mining. Finally, we define the intersection between artificial intelligence (AI) and trading and present some potential negative effects to take into account.
Better Together: Blockchain and AI
Blockchain is the base of all cryptocurrencies. It is a decentralized data storage and management technology. Blockchain’s transparent and decentralized nature ensures high security. Artificial intelligence also works with data. AI’s main ability is to process and analyze massive volumes of data and assist people in their decision-making. So, the combined use of blockchain with AI has the potential to dramatically alter a wide range of industries.
The crypto market is one of the areas where AI is considerably influencing. AI-powered algorithms are able to conduct thorough market analysis. One of the better examples is sentiment analysis using social media networks. Traders can then employ AI-generated assessments and reports to help them make decisions. Moreover, blockchain technology has the ability to help make AI algorithms transparent. Stakeholders can monitor the decision-making process of AI models via the decentralized ledger, and ensure that it is logically sound. The resulting clarity may attract many new investors and institutions to the crypto space, enabling it to develop even quicker.
How Can AI Technology Help the Crypto Sector?
The crypto sector can benefit from AI in many ways. Here are some of the most significant positive effects of AI on the crypto market in the near future:
One of the main concerns about cryptocurrencies is money laundering and illegal activities. To address this issue, authorities can use AI-powered algorithms to analyze the transaction data recorded on the blockchain. So, AI can help them detect fraudulent activities and identify suspicious patterns in transactions. AI can also track stolen or dirty funds across the blockchain and prevent money laundering.
As a trader or investor, you can use AI to evaluate market risks and predict price movements. AI-driven analysis tools use historical market data to learn about the patterns and behavior of the markets and apply their knowledge to predict the probabilities of bullish or bearish movements. Sentiment analysis is also another field where AI is proven to be very helpful. AI can do what it does best, that is, analyzing loads of social media data. As a result, it can determine whether an asset is overbought or oversold with decent accuracy.
To develop robust trading strategies, traders need to backtest and analyze historical data. This testing is done to determine whether the strategy is able to perform well in different market conditions. AI’s ability to process large amounts of data at a considerable pace can be highly advantageous for testing and strategy development.
Automated trading tools are highly beneficial. They can react quickly to price fluctuations and execute orders when the time is right. As a trading technology solutions provider and considering the market’s demand for innovative automation services, Finestel as a notable example, is developing various automation tools and delivering them in the form of a white label solution as well. These services include copy trading, portfolio tracker, signal automation services, TradingView bot, etc.
Finestel’s TradingView bot connects your exchange account to your TradingView account. Whenever your strategy’s pre-determined entry criteria are met on TradingView, Finestel’s TradingView bot will execute the generated signal on your exchange account. This bot can either execute the trade on the master traders and their investors’ accounts or even send the signal to a signal provider’s community. Moreover, Finestel’s signal automation will be able to automate the trading signals issued by signal providers. These two services are only a couple of automation tools being developed by Finestel and will be released soon.
AI-Driven Trading Tools
Advanced trading platforms offer comprehensive tools such as personalized performance metrics and dynamic risk management tools. These services can significantly help any trader and make potential improvements to their performance. This might be one of the most pronounced effects of AI on financial markets, especially the relatively immature crypto market.
Analysis of Cryptocurrency Market Sentiment
Using AI-powered tools, you can perform sentiment analysis. This is usually done by scanning social media, news articles, and other sources. The resulting information can aid you in understanding the market’s mood and whether it is over-bought or over-sold.
AI and blockchain are able to create security and transparency together. Users can manage and store data such as blockchain transaction records and exchange wallet information. By preventing unauthorized access to valuable information, AI and blockchain might be a match made in heaven when it comes to security.
Content and Education
AI chatbots like ChatGPT, Bard, and Bing could be extremely useful in creating high-quality content for cryptocurrency websites. Individuals can also use these bots to get answers to their cryptocurrency-related questions. This would help raise public knowledge of the cryptocurrency space. If more people know about crypto, more are likely to invest, leading to market growth.
The Impact of AI on Crypto Mining: Efficiency and Sustainability
Mining might be the most controversial topic about cryptocurrencies. Bitcoin mining, in particular, requires a lot of energy and computing power. While Bitcoiners support mining by stating that energy consumption is necessary to keep a worldwide financial system up and running, critics argue that mining is harmful to the environment and aggravates global warming. AI can finally settle this issue. In fact, this might just be the biggest effect of AI on the crypto market in the future, in terms of mass adoption.
Using AI in mining operations, miners can determine the hours of peak energy consumption and network difficulty, as well as low usage. AI can also predict crypto prices and energy prices and use these models to optimize mining operations to gain the most profits. In other words, miners would know the right coin to focus on and the right time to mine it.
Where do AI and Crypto Trading Intersect?
In previous sections, we have introduced a few of AI’s functionalities in the crypto space. Yet, trading is the standout intersection between crypto and AI. AI-powered bots can do crypto trading. These bots possess the ability to dynamically adapt to market changes swiftly, using machine learning algorithms. This agility and accuracy pave the way for AI to establish a presence in the trading sector.
Additionally, there are risk management and testing tools that leverage AI technology. These tools analyze your historical trading data to identify patterns, assess strengths and weaknesses and perform analysis. Consequently, they can assist you in optimizing your risk management strategy. This brings you closer to achieving your goal as a trader – maximizing profits while simultaneously reducing risks.
Possible Drawbacks to Consider
However, it is important for traders to recognize drawbacks associated with the amalgamation of AI and crypto trading despite its nature. It is crucial to acknowledge these risks and limitations. Here are some key disadvantages;
Crypto Market Volatility
Even though designed AI trading bots can be highly efficient, at making decisions and executing trades swiftly. Yet, the crypto market is incredibly unpredictable. There are situations where even AI algorithms would face difficulties, in making decisions.
Tuning AI algorithms based on historical data can lead to over-optimization. In this case, the trading bot would perform exceptionally well in the past. Yet, it will likely struggle to perform in new scenarios.
Just like people, AI-powered trading bots can make mistakes in their decisions and trading execution. These mistakes are usually a result of miscalculations and technical glitches. Therefore, they require constant monitoring and maintenance to ensure accuracy.
AI trading bots are also responsible for carrying sensitive information, as they communicate with crypto exchanges. This information might be valuable to many cybercriminals, attracting them to break the security measures of the bot and gain unauthorized access. They would then be able to steal the information and inflict heavy financial losses on the users.
Dependency on Historical Data
AI algorithms mostly use historical market data to make predictions. In fact, this is their method of learning. In a rapidly changing market like the crypto market, some trading bots might find it difficult to adapt on time. The delay could lead to significant losses for users.
Lack of Human Intuition
AI algorithms are very smart and efficient in handling data. However, they still lack our intuition. So, relying solely on AI for making trading decisions, without overlooking the process might not be a good idea.
Depending on the jurisdiction, using AI trading bots might cause regulatory issues. Bot developers need to consider rules and regulations of the specific jurisdiction they work in, and try to adapt to comply with them.
Cost and Performance
AI is still a new technology, at least for ordinary people and retail traders. Therefore, there are significant costs associated with using high-quality AI-powered bots. And things get even worse when you realize that paying for these bots will not guarantee success, because they might still lose.
AI’s importance is growing in the crypto space, as it offers various use cases. In this article, we analyzed the effects of AI on the crypto market in the near future. We discussed the potential intersections of AI and cryptocurrencies and explained why artificial intelligence and blockchain might be a match made in heaven. One of the main areas where AI would be highly beneficial is crypto trading. Just like copy trading platforms that enable you to delegate your trading activities to expert traders, you can use sophisticated AI-powered trading bots. This would immediately remove emotion from trading, which is one of the main obstacles in every trader’s journey.
As one of the leading trading technology providers in the crypto environment, Finestel is leveraging artificial intelligence to provide cutting-edge trading tools and copy trading services. You can learn more about Finestel and the numerous services they provide by exploring their website and blog. With Finestel, you will be able to take a massive leap forward in your asset management or private investment journey, ensuring longevity and success in the long run.