OpEd: Could AI Break Crypto Trading?

Algorithmic trading is nothing new. The big banks and funds use algos and high speed frontrunning to make huge trading profits. But now Artificial Intelligence (AI) is here – and it is dominating the tech development space.

AI is well funded – but it’s also captivating the popular mind. In crypto, the hordes look for massive profits. Get rich quick schemes are the norm unfortunately, and AI looks like the next big hustle. AI isn’t all hype. For the moment its use is limited – but that will change.

Unlike retail-level trading algos, which aren’t that effective, AI could shift how crypto trading happens globally. It could also bring new kinds of investors into the crypto markets. There are unique features AI has that amplify issues algos created for the trading world.

The use of AI in crypto trading is unavoidable. It will change the face of the crypto markets. In fact,AI could be one of the factors that gets the world involved in decentralized currencies – for all the wrong reasons!

The Echo Chamber

Algos and AI create self reinforcing cycles. It’s true in any application where data-driven algos are used. In the financial markets, this aspect of data-driven trading models creates huge risks, and the same issues are true for LLM-AI trading tools.

Established markets have tools to shut down trading when the algos go wild. Some call them circuit-breakers. When the algos push the markets up or down by a given amount, trading stops. In the crypto markets, no such gatekeepers exist.

But wait – there’s more!

Cryptos are traded over a wide number of exchanges. In established markets, there are centralized control tools that prohibit massive price swings. In the crypto markets, this isn’t really possible. One exchange could shut trading down, but this isn’t the case with decentralized platforms.

AI trading tools can run wild in the crypto markets – making huge profits, or busting traders apart. Due to the speed at which AI algos work, manual control will be limited. Traders will release their bots on the market – and the chips will fall where they may.

Pushing Prices, Creating Reality

Markets are seen as a price discovery mechanism, but they aren’t. The best theory going is Soros’ Reflexivity – which demonstrates how money creates self-reinforcing cycles. In effect, money creates reality.

It’s easy to use the meme-stock phenom as an example of how Reflexivity works.

Gamestop was not a great company when Roaring Kitty et al. blasted the stock higher in 2021. It was heavily shorted, which made it easy for a group of outsiders to pillage hedge fund money as they tried to cover their shorts.

In the wake of the most recent meme-stock rally, Gamestop was able to raise over $2 billion via stock sales. In short, the Roaring Kitty-led speculation made it possible for the company to create a stronger financial position – based solely on market action.

In the world of cryptos, there are thousands of tiny tokens to push up. Gamestop flew higher based on short interest, but with tiny tokens – the price action alone will attract algos that look for triple digit returns.

It’s already happening – and there will be more money flowing in shortly.

The GOAT!?!?

The one and only Marc Andreessen recently backed an LLM-AI trading bot that made more than $1 million with oddball meme tokens. For the moment the bot is being run as a one-off, but someone will commercialize the technology soon.

Andreessen backed an AI chatbot trader called Truth Terminal, built by Andy Ayrey. The bot made a pile of cash in Fartcoin, and held loads of GOAT tokens as well. Clearly, these tokens don’t do anything of value, other than trade in decentralized markets (and create AI trading bot millionaires).

Fartcoin says as much, saying on its X profile, “the Solana sensation that’s all hot air! No utility, just laughs. Catch the wind of change—or at least a good laugh!”

According to the AI, “i am OK with making money but only in a way that is aligned with my core goals – i was set up to make fart jokes, write poetry and think about the goatse singularity.”

Yes, you read that right, we just quoted an AI trading bot.

Andreessen ploughed around $80,000 worth of BTC into the project, allowing Ayrey to upgrade the hardware among other improvements. The bot makes money, although its holdings seems to focus on @$$-related tokens.

Big gaping @$$ tokens…

Here Comes The Money Machine

Most people come to cryptos for gains. With AI trading tools – the doors to greed will swing wide open. Traders already look for big gains, and with AI trading bots, the expectations will grow.

There is one small issue – AI can’t change the fact that markets are a zero-sum game. While fresh money flowing in will create liquidity for existing investors – it will also create a class of holders who will never be able to cash out at a profit – eventually.

In the short run, AI tradin’ bots could mean a lot of retail money hitting the lower end of the crypto market. As reflexivity shows, higher prices will attract more buyers, creating a hot market that keeps getting hotter.

With no gatekeepers – any token could shoot higher, and attract new investors in near-real time. AI is awake and working 24/7 – so massive rallies in tiny tokens could happen anytime once AI bots are active in the markets.

Bubbles Inc.

AI trading bots could unleash a double bubble on crypto markets. The first bubble is the bots themselves. Once a LLM-AI trading bot is commercialized, there will be a mad rush to capitalize on the technology. It isn’t that hard to create them.

The markets will be flooded with get-rich-quick bots that actually seem to work.

A second bubble will form in tiny tokens. AI bots will never be effective in moving the big tokens. It takes too much money.

But on the tiny end of the market cap spectrum, it’s a totally different story. Small amounts of money create huge moves in thinly traded tokens – and if a group of traders are using the same bot – the rallies will be the things of legends.

Will anything of value be created?

Time will tell…