The Bitcoin Market (BTC) has been quiet lately. Too quiet…
Since Tuesday, Bitcoin volatility levels have fallen to levels not seen since 2017. In the last few weeks, Bitcoin has lagged behind as investors have raced for altcoins such as Chainlink (LINK) and Cardano (ADA).
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One possible explanation for Bitcoin’s consolidation may be the increased presence of high-frequency trading companies (HFT) in cryptosystems in recent months. Speaking to Cointelegraph, Paolo Ardoino, CTO of Bitfinex, explained that he believes HFT is one of the main reasons for Bitcoin’s low volatility.
„In crypto space, we’re going back to the old days of HFT before it became the zero-sum game it is today. In HFT crypto-currency, companies can make a lot of money by deploying relatively simple games, such as cross-exchange arbitrage, and exploiting the difference between one exchange and another.“
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HFT and cryptomontages
HFT is a trading method that uses algorithms to trade a large number of orders in a split second. It has existed in crypto space for a long time. But just as billionaire Paul Tudor Jones recently revealed his holdings in Bitcoin, other institutional investors are increasingly joining the market. This may explain the increased use of HFT.
Bitfinex, which claims to be „huge for HFT in crypto,“ recently revealed that 80 to 90 percent of the volume at Bitfinex was now generated by HFT companies. Bitfinex has partnered with Market Synergy and has been offering „standard institutional crypto connectivity.
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Bitfinex concludes that the growing use of HFT represents a growing „maturity in the digital asset space. But why would Bitcoin’s volatility decrease with increased Etoro use? Ardoino explains that increased liquidity due to increased HFT operations leads to low volatility:
„As Bitcoin becomes an established asset class, we expect the high levels of volatility associated with cryptosystems to fade away,“ he explained. „There is generally an inverse correlation between liquidity and volatility; that is, higher liquidity tends to lead to lower price volatility.
„The growing presence of HFT companies in crypto space seems to have added more liquidity to the cryptoexchanges,“ he says. „This provides sufficient orders for both sides of the order book and increases market efficiency, contributing to a prolonged consolidation of low-volatility prices in Bitcoin.
Bitcoin is famous for moving aggressively for a short period of time. Last year, Fundstrat’s Tom Lee reminded investors that most of Bitcoin’s (BTC) gains come on the top 10 trading days of the year. However, the growing presence of the HFT may be changing the „best 10 day rule“ as well.