To understand what it is, what it does, and how (if at all) it impacts the value of Bitcoin and other cryptocurrencies, here’s a simple explanation of the principle.
HFT is a rather complex process. It’s a trading technique which relies on specialized algorithms, software, real-time market data, among many other things to outperform the competition.
This system can make many more trades than individual traders per second. It also relies on getting in early on the action and perfect timing. The technique offers many variations and often benefits from high-end equipment and computing power. As well as ultra-low latency.
As part of HFT you’ll find strategies such as arbitrage, pinging, market-making, colocation, and others.
The goals or end results of HFT aren’t just about profit. It’s impact on the market shows that HFT adds more liquidity. Also, due to the large number of orders executed, it can get rid of many small bid spreads.
Obviously, the bigger, institutional players can get ahead of the competition using this trading technique. But because institutional traders have the advantage of powerful equipment and large blocks to trade, the resulted liquidity is often just momentary. It’s not something that smaller players can also take advantage of.
HFT is becoming a more common tool in the crypto trading market. Its proponents and practitioners bring simple arguments to the table. HFT provides stability and liquidity, two things that the crypto sphere always needs.
However, this comes as a disadvantage to smaller traders that don’t have the equipment or funds to employ the same tactic.
The speed of high-frequency trading will never benefit low-tier investors in the long run. As it stands, it’s considered a practice of elitism, especially given the decentralized nature of crypto assets and markets.
Yet there’s no denying that since the implementation of traditional trading techniques on the crypto market, most crypto coins have gone up in value. One effect that’s clear is that HFT enacted by large players allows regular traders to find matching orders much faster.
Regular traders can’t hold a candle against institutional players that have the advantage of making multiple trades in a fraction of the time. Including trading on multiple platforms and inducing or profiting or market spikes.
The crypto market doesn’t have the same stability as the traditional financial market. It needs more worldwide adoption, backing, and well-established purpose.
There is a risk that HFT can crash the crypto market and cause Bitcoin to drop in value, more than it has in the past few years. Why? It’s quite simple.
Using HFT techniques for Bitcoin and crypto trading involves using a risky technique in a volatile environment. When some market conditions are just right, HFT can cause a significant sell-off that affects all regular traders.
Furthermore, flash crashes are more common in the crypto market. So, while HFT should bring stability and liquidity, it can also increase the volatility of the crypto market.
Of course, arguments are given both for and against using this trading technique when investing in cryptocurrencies. In reality, only time will reveal the long-lasting effects of high-frequency trading on a market prone to volatility and flash crashes.
Right now, it’s too early to tell if those that do it are doing the right thing. The only thing that’s clear is that HFT did have a positive impact so far. And it also helped both big and small players profit faster from their crypto trades.
But, at the end of the day, it’s also creating a bigger discrepancy between institutional players and regular trades, even those with more experience in the crypto sphere. Volume and high-frequency trading can often beat experience.
Just because HFT made its way into the crypto trading market it doesn’t mean that it’s accepted in all forms on every platform. For example, HitBTC and Coinbase only offer colocation for HFT users. Not all platforms are built to handle HFT with cryptocurrencies. So regular investors and traders aren’t out of the game just yet.
Very few companies have made a definitive move towards decentralized assets such as Bitcoin and other cryptocurrencies. The trading technique is here to stay. But it will take longer until it will have a definitive and game-changing impact on the price of Bitcoin and other cryptos.
High-frequency trading (HFT) is a known trading principle of traditional financial markets.
Written by Sam
COINRATECAP