Algorithms That Control the Cryptocurrency Market

Did you know that most systems that we use on an everyday basis are actually controlled by algorithms? These algorithms do their job invisibly. Pervasive algorithms, for instance, control our entertainment needs like Spotify or Netflix, data that we read on Google, or whatever Facebook and Twitter are taking about. Similarly, even in the crypto space, it is the algorithms that control core processes.

One example in this context are the algorithmically-controlled stable coin projects which have appeared in the scene in the past few years, like the USD coin, Tether or USDT, and TUSD or True USD. The dollar-pegged stable coins are comparatively easier to understand than the algorithmic stable coins. These are cryptocurrencies that can achieve price stability through algorithmically increasing the coin’s circulation to show market behavior. The TMV or Take Timvi, for instance, is an ERC20 token; its algorithm targets a $1 price for mitigating volatility and boosting investor confidence. This security token depends on the ETH deposits made by participants in this ecosystem and tools like Tbox, Tbond and Leverage. This enables users to earn interest in both bear and bull markets. When the ETH price falls and influences the collateral in the Tbox, the owner of Tbox has to recapitalize through ETH/TMV deposits. When they cannot, the Tbox is declared toxic and others can enter to do make deposits.

Another popular algorithm is the Reserve which is supported by investors like Coinbase. This is supposedly one of the biggest projects to watch out for this year. Similar to the Timvi, the stable coin ecosystem will use algorithms for manipulating the supply, thereby maintaining its price and ensuring a balance amongst stability, profitability, and decentralization.

Earlier, traders would gather on exchange floors and bark into phones or make hand gestures. But with the emergence of digital markets, trades are now executed using algorithms and not humans. So, emotions are completely eliminated from the equation. These algorithms allow traders to start trades at the right prices taking into account factors like timing, trade volume, and market conditions. HFT or High Frequency Trading is one such trading strategy used even in stock markets. This high-speed process ensures that traders employ trading algorithms to take advantage of the prices differences across markets. Sometimes, the HFT firms even place their servers close to the matching engines of exchanges to enjoy an advantage of speed and get past with higher profits through arbitrage. For instance, Huboi in Singapore made this arrangement and called it colocation to HFT traders, so that trades could be made much faster. Similarly, the cryptocurrency trading is carried out by many newly invented automated trading bots in the market that use these algorithms. Peep in here to find out more about the one of the bitcoin autonomous trading bots.

Algorithms cover different kinds of strategies ranging from the TWAP or time-weighted average price where traders will buy or sell fixed amounts of any asset over time, to iceberg strategy when traders will sell or buy large orders of any asset without showing its true volume. Crypto forensic businesses like Chainalysis use some proprietary algorithms for monitoring and detecting suspicious transactions on exchanges. They can identify people operating on behalf of hawkish legislators. The software Chainalysis KYT will track transactions of Bitcoin, Litecoin, BCH, and Ethereum on exchanges. Such firms are being encouraged for helping cryptocurrency platforms ensure regulatory compliance. Even government agencies are employing these firms like the Department of Homeland Security to de-anonymize cryptocurrency users. This is why the pro-privacy advocates are slightly concerned about effects of these incursions. Privacy advocates are now coming out with their own algorithms like Solomon by Samourai.