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High-Frequency Trading in Bitcoin

The price of a bitcoin reached $1000 in December, the level previously visited in December of 2013. The latest moves in bitcoin could be caused by active high-frequency trading. Bloomberg reports:

Forget libertarians, speculative individual investors and Chinese savers trying to spirit money overseas. The reality is that professionals armed with cutting-edge technology now drive as much as 80 percent of bitcoin trading, mimicking strategies honed by some of the biggest players on Wall Street. To them, bitcoin is just the latest asset class ripe for conquering with machines.

The cryptocurrency’s market structure ticks all the right boxes: arbitrage opportunities across multiple exchanges, zero transaction costs on Chinese venues that host most of the world’s turnover, round-the-clock trading, and co-location services allowing participants to place their servers right next to those of the exchange. With volumes tracked by Bitcoinity.org surging to a record this month, there’s been no shortage of chances for high-speed traders to turn a profit.

Like all markets, the one for bitcoin comes with risks. At least two exchanges, Bitfinex and Mt. Gox, have suffered cyber attacks that saddled traders with losses since 2011. The cryptocurrency’s extreme price swings — average daily moves over the past year were three times bigger than those in the S&P 500 Index — have deterred some high-frequency firms, while the increasing dominance of sophisticated traders begs the question of how long the juiciest arbitrage opportunities will last.”

OkCoin, one of China’s three biggest bitcoin exchanges, estimates 60 percent of its transactions are executed by automated traders, while Huobi and BTC China put the figure at around 80 percent.“

Automated trading in the highly volatile bitcoin market may highly profitable, but the profit is achieved by effectively taxing all the transactions. Also, considering a very small bitcoin market capitalization (currently $13.5B), excessive high-frequency trading may destabilize the market.

See also:

High-Speed Traders Are Taking Over Bitcoin

Bitcoin market capitalization chart