War or bots? Trading with algorithms could lead bitcoin to fall this Thursday

Bitcoin recorded a sudden drop last Thursday, February 24, after the start of the Russian invasion of Ukraine. However, for some analysts and traders, the confrontation in Europe was not the main cause of bitcoin’s decline, but the automation of trading decisions, via software robots or bots.

In one twitter feed This Thursday, the founder and CEO of the decentralized exchange FTX, Sam Bankman-Fried, attributed the recent volatility of bitcoin to a confrontation between two types of traders, those guided by network fundamentals and those called “algorithmic traders”.

In the case of the decline in stocks before the announcement of war in Europe, Bankman-Fried argues that in general war is bad for business and that in a situation of lower liquidity, selling stocks seems a logical decision. . The sale of BTC would be explained by its strong coupling with traditional assets. However, the trader points out that assessing the role of correlation is different for different types of traders.

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Let’s say there are two types of people in the world: fundamental investors and algorithmic people. Those guided by fundamentals are watching the situation and not sure which way BTC/USD should move. Algorithm trackers query historical data.

FTX Sam Bankman-Fried.

Traders following the algorithm look at the data and have decided that there is an 80% correlation between BTC and the S&P 500, and also set a value of 4 for the beta parameter, Bankman-Fried explains. This means that if the S&P 500 moves by 1%, BTC should move by 4%.

In the case of the falling stock, the S&P 500 is down 4%, so algorithmic investors expect bitcoin to fall 16% and start selling on that expectation. An offer is then established between algorithmic investors, with a high rate of sale, and those attached to the fundamentals, who begin to buy, specifies Bankman-Fried. “BTC price turned out to be halfway down 8%,” the trader notes.

With the increasing automation of trading, robots make immediate decisions according to an already established schedule. This could explain the sudden drop in bitcoin price last Wednesday, the 23rd, as reported by CriptoNoticias.

In less than 24 hours, BTC recouped last Thursday’s losses. Source: Trading View.

The chart above shows the price drop on the night of the 23rd, followed by a strong bitcoin price rally on Thursday, which puts its price above $39,000 at the time of writing.

Regarding other reasons associated with the fall in the price of bitcoin, beyond attributing it to the war, CriptoNoticias published this Thursday an analysis that includes the situation of the various markets and the global economic outlook, as well as opinions of experts in economics and trade. . For the economist José Miguel Farías, it is not easy to predict the behavior of the markets, especially if there are hundreds of possible scenarios, with variables that are not controlled.

On the other hand, analyst Eduardo Gavotti points out that what mainly affects bitcoin is not geopoliticsbut monetary policy changes that have affected financial markets.

Sharon D. Cole