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  • Artificial Intelligence
  • Rehan Ijaz
  • SEP 10, 2019

The Role of AI in Cryptocurrency Market Forecasts

Just over ten years since bitcoin was introduced to the world, the cryptocurrency industry is going through its most interesting phase yet. The market is currently being shaped by a perfect storm of technological breakthroughs. While a number of technological advances are influencing the industry, artificial intelligence is arguably driving the biggest impact.

AI technology could be essential for dictating future cryptocurrency prices. Bitcoin.com cited a study showing that 23 hedge fund companies found AI increased their returns. They feel this study shows that AI can improve the profitability of trading cryptocurrencies as well.

AI applications will be expanded from financial firms into the cryptocurrency industry

Major financial companies have already been heavily disrupted by new AI technology. Investment and wealth management companies are using artificial intelligence to maximize the return on investment for their clients.

Traditional lenders and venture capitalists understand that AI creates a strong competitive edge. Therefore, they offer at least 15% more funding to startups utilizing AI. Some industries can increase funding up to 50% by demonstrating that they have created a business model that depends on cutting edge AI technology.

Although traditional financial companies have discovered the wonders of artificial intelligence, the cryptocurrency industry has surprisingly lagged them with unrolling AI solutions. The cryptocurrency industry is known for relying on the most novel technologies. It was behind the inception of blockchain, which is currently being used by countless other industries. However, the one area that virtual currency companies have not taken advantage of new technology is with forecasting asset prices.

One of the reasons that cryptocurrency trading platforms and investors have been slower to use artificial intelligence for asset valuation and forecasting is that they didn’t think it would be so reliable. They feared that the number of independent variables affecting cryptocurrency prices was simply too high for any AI algorithm to account for. Experts with dual specializations in cryptocurrency markets and artificial intelligence argue that this criticism is misplaced. They have developed new simulations that can evaluate trillions of hypothetical trading scenarios, so they can account for almost all uncertainty.

How does AI help with cryptocurrency valuation and forecasting?

Developers have encountered complications developing AI algorithms to forecast cryptocurrency prices, which didn’t exist with forecasting traditional financial asset prices. Stock, bond and derivative valuations are based on objective data, such as company return on equity (RoE) ratios, Federal Reserve interest rates, LIBOR movements, debt to equity ratios and financial indices that are typically used for benchmarks.

Cryptocurrency prices are not influenced by similar data, so estimating their intrinsic value is much more complicated. This means that AI programmers needed to get a better understanding of the cryptocurrency market before they could develop algorithms to forecast prices.

They discovered that cryptocurrency trends are primarily influenced by herd behavior, which artificial intelligence technology takes into consideration. Developers have created recursive neural tensor networks (RNTNs), which are able to identify the relationship between semantic content and cryptocurrency prices.

These algorithms mine data from a variety of social networking sites and news content related to cryptocurrencies. They extract a variety of words and parse them into binary trees. These decision-making trees evaluate the relationships between cryptocurrency prices and the relevant words through very sophisticated regression analyses.

What impact will predictive analytics algorithms have on market values?

Artificial intelligence will play an increasingly important role in gauging asset prices of cryptocurrency. These tools are probably going to become increasingly accurate as they evolve.

The real question is what impact AI will have on market speculation on volatility. Experts have not weighed in on this much yet, because the technology is still in its infancy. However, it could go either way.

The market is most likely going to become more efficient and less volatile as artificial intelligence technology becomes more impregnated into the industry. Trading platforms and other industry influencers will allow AI to determine prices in real-time, which could help minimize volatility.

On the other hand, outside influencers could find creative ways to game the market, which could increase volatility. They might discover the complex relationships between artificial intelligence and website content that is supposed to dictate trading behavior. Since intrinsic value variables won’t be as influential in cryptocurrency prices as they are with traditional financial instruments, it could be a lot easier to manipulate the markets. This could lead to a market with even more volatility than the status quo.

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