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Demystifying algo trading in crypto markets


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The following article is an op-ed by Laurent Benayoun, CEO of Acheron Trading.

Algorithmic trading, or “algo trading”, has swiftly established itself within the financial landscape, particularly within the volatile, high-paced crypto market. While often perceived as a domain for high-frequency traders with deep pockets, algo trading is, at its core, about automating trading strategies to create a more systematic, unbiased approach. The crypto market has proven to be an ideal playground for these strategies, given its 24/7 operation, high volatility, and rapid evolution, but misconceptions persist.

While many assume algo trading is synonymous with high-frequency trading (HFT), it’s actually a broader category. In fact, algorithmic trading is responsible for approximately 60-70% of overall trading volume in developed markets, with a significant portion of trades automated to replace human inconsistencies with disciplined, data-backed decisions. An algorithm might follow simple rules, such as moving average crossovers or more advanced predictive models, strategies that bring precision and structure to trading decisions in a market that never stops.

Despite its strengths, algorithmic trading faces challenges: the biggest being the need to adapt to unpredictable market shifts and rapidly changing technologies. However, its potential is enormous: the global algorithmic trading market size was valued at around $17 billion in 2023 and is expected to reach $65.2 billion by 2032, growing steadily as both retail and institutional players adopt these technologies. This growth demonstrates the potential of algo trading to facilitate faster, more data-informed trades, while democratizing access to trading strategies previously reserved for institutional players. By addressing these challenges and dispelling myths, we see how algo trading is transforming crypto into a more accessible and resilient landscape for all types of traders.

Algo Trading Isn’t Just for Big Players

One common misconception is that algo trading requires substantial infrastructure and data resources, making it exclusive to those with deep pockets. While high-frequency trading can indeed benefit from cutting-edge technology, most algo strategies can be implemented with basic tools. Many algorithms today focus not on speed but on simple functions such as a dollar cost average strategy rather than to gain a split-second advantage.

Dispelling the myth that algo trading is limited to the ultra-elite is crucial in widening access to these strategies for all traders. This is especially true in crypto, where algorithmic trading accounts for up to 80% of daily trading volume on some major exchanges, making it an effective tool for interpreting and responding to the real-time shifts unique to this market.

In crypto, for instance, we see pronounced effects from influential voices, whether it’s an Elon Musk tweet about Dogecoin or regulatory announcements that send shockwaves across the market. Some traders use natural language processing (NLP) to score the sentiment of social media posts and press articles, assessing whether a statement is positive or negative. By doing so, algorithms can react faster than any human could, taking positions that align with anticipated market sentiment. But while these models can be incredibly powerful, they must be used cautiously, as their reliance on “the crowd” can sometimes amplify irrational market movements.

Further, with machine learning, algorithms can be trained to identify market patterns, which can then inform trade decisions. But machine learning isn’t a “set and forget” solution. It requires constant refinement and adaptation, especially in a market as dynamic as crypto.

There is no question that algorithmic trading holds distinct advantages over manual trading in terms of speed, scalability, and consistency. Algorithms don’t tire, aren’t swayed by emotions, and can execute trades 24/7, traits that are invaluable in the fast-paced world of crypto. Yet manual trading still has an important place, particularly in long-term strategies or scenarios requiring human judgment and flexibility.

A common myth is that algos will always outperform manual trading, but that’s not the case. Rather than replacing traditional approaches, algo trading works best as a complement to them, blending the efficiency of automation with the insight of human experience.

Institutional Tools for All Traders

One of the most exciting developments in the algo trading landscape is the increasing accessibility of tools like NLP and ML. Today, even relatively simple strategies, such as setting up an automatic buy order when a specific asset reaches a pre-set price threshold, can be implemented with minimal programming knowledge.

This democratization allows retail traders to participate with tools previously reserved for large institutions, fostering a more level playing field and enabling a broader set of market participants to compete and implement their own strategies.

As the crypto market continues to mature, algorithmic strategies must evolve alongside it. Trends such as meme coins demand flexibility from algo traders. New regulatory frameworks, like MiCA in Europe, also add complexity, as compliance and market adaptability become increasingly necessary. Innovations like decentralized exchanges new mechanics are also likely to influence trading approaches moving forward.

A More Resilient Market with Algo Trading

Ultimately, algo trading participates in building a more resilient market, with information being incorporated into prices more efficiently and trading decisions being more systematic. Retail access to these tools also fosters a diverse market.

Moving forward, responsible algo trading can drive growth and resilience across digital asset markets, making crypto the future of finance.

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