Understanding Cryptocurrency Markets Sudden Rallies and Crashes

Since yesterday we are experiencing another sudden cryptocurrency markets crash between %5 to 10% and beyond. The usual silly explanations of self-styled crypto-experts started to appear on Forbes, Bloomberg, and a few other minor sites. As I have written in the past here on my blog, the reason for such sudden and violent volatility has nothing or very little to do with the real-word events capable of influencing the so-called ‘market sentiment’.

The sudden and violent volatility has nothing or very little to do with the real-word events capable of influencing the so-called 'market sentiment.'

In my professional understanding, the wild volatility of the cryptocurrency markets is made possible, but not necessarily caused, by the massive use of bots in an HFT (High-Frequency Trading) context. This statement becomes clear if we consider that currently more than 95% of all crypto trades by value are arguably conducted by bots versus the approximately 50% on the US stock market and 40% in Europe and Japan.
We may argue that HFT helps to increase the liquidity and to stabilize the crypto markets. Yet that is not entirely confirmed by observations and analysis. The drawbacks are a lot heavier than the hypothetical advantages. HFT, in facts, offers a suitable context for more complex and stealthy methods of market manipulations based on, for instance, 'swarm layering' and systematic and often massive ‘wash trade’.

High Frequency Trading (HFT) offers a suitable context for complex and stealthy methods of market manipulations based on 'swarm layering' and massive 'wash trade'.

These reckless manipulation techniques offer also an opportunity for mutual attacks by followers of cryptocurrencies in a close competition (a de facto 'crypto-hooliganism'). As an example, the overselling of Litecoin or Ethereum and the unexplainable declining price could be attributed largely to such methodical assaults.
According to the behavioral dynamics, we should distinguish between two principal categories of bots unleashed across the cryptomarkets:
- Trader Bots
- Manipulator Bots
The bots belonging to the first category operate according to rules essentially defined via the anticipation of trends and known patterns (e.g. by using Technical Analysis, Machine Learning Modeling, etc.) by feeding, in principle, on available both historical and real-time data.

The Trader Bots operate based on rules defined via the anticipation of trends and known patterns by feeding on available historical and real-time data. 

The second class of bots follows a totally different logic, one that we may overall qualify as a Swarm-Intelligence-based behavior that serves a totally different purpose: Market well poisoning to mislead the first category of bots (Trader Bots) with real-time both dynamic and self-adapting (a bot that can change its performance in response to its environment) fake data. Such behavior is very similar to the spreading of fake news and the so-called “alternative facts” via twitter, Facebook and other social media, for instance, during an election campaign. It could be, in fact, either FUD (fear, uncertainty, and doubt) or FOMO (Fear Of Missing Out) generated by using self-adjusting bots behaving according to Swarm Intelligence modeling.

The Manipulator Bots generate fake data at the speed of light by using real-time self-adapting behavioral modeling based on Swarm Intelligence.

By delivering such misleading strategies, these bots constantly and at the speed of light, act to promote or to prevent certain trends and patterns and hence behaviors in and by the average trader bots (and humans) that move along a predictive line of reasoning.
Given that these hostile bots are often run by highly organized and often rival Pump & Dump gangs and franc tireurs across highly fragmented and unregulated exchanges, there is always the possibility of triggering either a virtuous (bullish) or vicious (bearish) cycle that could become suddenly very powerful via an echo chamber effect (e.g. FOMO, Stop Loss trigger, etc.) and generate either a crash or a rally scattered across the global markets at the speed of light (Arbitrage). The end results are always unexpected and extremely difficult to anticipate. This happened before and now is in full development in front of us again.
In the absence of a clearly defined regulatory framework enforced by advanced AI and Swarm Intelligence-powered trade surveillance (yet to be designed and implemented for a highly sophisticated cryptomarket), the situation will inevitably degenerate. This process could well put a tragic end to one of the most promising Fintech innovations of the last decades.
Can OTC and DEX help to prevent these sudden cyclic wild volatility? I wouldn't hold my breath- at least not for the time being.
As the lyric goes: Play at your own risk!