Bitcoin has recently recorded a low volatility level, reaching its lowest level on the 14th of July 2020 since 2017. In fact, the market is being reported to be too quiet and boring. This is as a result of the increased use of High Frequency Trading, making bitcoin fall behind as investor are now preferring to invest in altcoins like Chainlink (LINK) and Cardano (ADA).
According to Paolo Ardoino, the Chief Technology Officer of Bitfinex, the use of high-frequency trading is the main reason behind the low volatility of Bitcoins. He explains that crypto had reverted to the old days of High Frequency Trading and had become a zero-sum game. He advices that crypto High Frequency Trading firms could make much more money by using straightforward methods like exploring the spread between exchanges and cross exchange arbitrage.
High Frequency Trading has existed in cryptocurrency market for a long time. It is a trading method that transacts a large number of orders in fractions of seconds using algorithms. There is an increased presence of firms that are using High Frequency Trading to trade recently. Bitfinex, a Bitcoin trading firm, revealed that an approximate of 80 percent to 90 percent of their volume was generated by High Frequency Trading firms. The firm revealed that it had partnered with Market Synergy and had been offered an “institutional standard cryptocurrency connectivity.”
Bitfinex further explains that the increased use of High Frequency Trading represents the maturity of the digital asset platform. Even with the maturity of the digital asset platform, Ardoino says that the low volatility was due to the increased liquidity caused by the surge of High Frequency Trading. He further explains that there is an inverse correlation between volatility and liquidity where the higher the liquidity the lower the price volatility would be. According to him, the increased presence of High Frequency Trading firms, added the liquidity of crypto exchanges which provided sufficient orders and increased market efficiency which in turn contributes to low volatility price consolidation in Bitcoin .
Last year, Tom Lee from Fundstart told investors that a majority of Bitcoin gains come in the ten best trading days of the year creating a “Rule of 10 best days”. However, due to the increased use of High Frequency Trading, the “rule of 10 best days” is changing.
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