Bitcoin Trading Agents

 

Tom Bell, an engineer, entrepreneur and author, having had significant involvement in software development, marketing and management with a number of technology start-ups recently wrote a paper titled: Bitcoin Trading Agents. The paper does a good job applying analysis to bitcoin trading. Below are some highlights that are of interest.

Bitcoin Trading Analysis

 


 

Overview

Crypto-currencies such as Bitcoin offer a decentralised peer-to-peer form of transferring funds. Bitcoin’s value drivers and consequently its price dynamics are different from those of state-issued currencies, due to differing the motivations for its use. This project explores the characteristics of Bitcoin as a currency, its users and the market forces which drive its price variations. In addition, this project summarises the factors which differentiate it from traditional currencies and explores the important considerations when designing automatic trading agents. Existing trading agents for Bitcoin are explained and compared, and suggestions are made regarding the important directions for future research in this field.

Bitcoin as a stable currency

Rather than Bitcoin rising in value with the VIX, which may be expected as investors might seek to store assets as bitcoins in times of high volatility in traditional markets, instead Bitcoin seems to be inversely correlated with the VIX. We have seen then, that regarding public interest as seen from Google Trends data, programming enthusiasts and criminal activity are the most significant contributors, however when correlating traditional market volatility with Bitcoin, investors seem to play a significant role in Bitcoin usage.

Bitcoin Users

We have seen that there is good reason to think that the hypothetical wide-spread usage of Bitcoin as a global currency has the strong potential to offer good macroeconomic stability long-term, however Bitcoin usage has not yet reached this stage and the behaviour of its users are not representative of what this hypothetical outcome would be.

Bitcoin price drivers

It is important to note that over the past few years, time and frequency characteristics of Bitcoin have evolved significantly and it is clear that the driving forces of Bitcoin have changed since its inception to the present. In addition to this price level relationship, they observe that Bitcoin price is positively correlated with supply in the longterm, such that as the supply of Bitcoin increases, as they are
mined and made available for sale, their value increases in the long term. This is seen most clearly at scales of between 30 and 100 days.

Bitcoin’s unique factors

The nature of Bitcoin as a crypto-currency means it is used in different ways and for different reasons to state-issued currencies and therefore needs to be understood and modelled in different ways. The review of the drivers of Bitcoin price have shown that there are intrinsic differences in the metrics which must be used to fundamentally analyse the value of Bitcoin as a currency, when compared to traditional currencies.

We have found the standard supply-demand fundamentals that are present in both state issued currencies and commodities are also present in Bitcoin.

Due to the decentralised nature and global usage of Bitcoin, its demand is driven by different factors than state-issued currencies. In addition, the relative immaturity of the Bitcoin market contributes to its unique behaviour.

Conclusion

The rise of the crypto-currency presents huge challenges for the investor. As a currency which is created, stored and transferred in completely different ways, its driving forces (despite being an asset whose price is described by traditional supply-demand fundamentals) are different from state-issued currencies and are explained by different factors.

Bitcoin is a new phenomenon in the world of finance and technology and there is huge potential for Bitcoin to become the de-facto global currency and offer stability, security and ease of use. As the world makes the shift, the financial, industrial and domestic areas of society must more fully understand the risks, benefits, technology, behaviour and limitations of Bitcoin as a common crypto-currency. For financial institutions
concerned with using and investing in Bitcoin, research into the drivers of Bitcoin price, the supply-demand fundamentals, the underlying drivers of user-base growth and the ways to measure important features of the Bitcoin market are essential.

About the University

The School of Electronics and Computer Science at University of Southampton (ECS), was founded in 1946 by Professor Eric Zepler. Eric, was a German-born electronics expert and chess problem composer. A Jew, he fled Germany in 1935, leaving behind all his possessions, and settled in England. In 1947 he founded the Department of Electronics at University College, Southampton (now the University of Southampton), one of the first in the world.