High Speed Traders Conquer the Bitcoin Market

Forex and stock arbitrage traders make money on the momentary inefficiencies of their respective markets. However, this requires a lot of work because the stock and Forex markets are basically very efficient. However, there is a place in the world of alternative currencies where high speed arbitrage can be routinely profitable. Bloomberg writes about how high speed traders are taking over bitcoin.

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.

Is this a momentary phenomenon or will it last?

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-speed firms, while the increasing dominance of sophisticated traders begs the question of how long the juiciest arbitrage opportunities will last.

The most likely reason that the bitcoin gold rush will not last is that China needs to clamp down on ways that their citizens are moving assets offshore. As its currency falls and China loses its currency reserves it has been making it harder for its citizens to convert their wealth into offshore currencies. Thus the bitcoin is an idea way to get money out of Yuan and eventually into greenbacks, Euros, Yen or British pounds.

As China’s economic miracle unfolded the nation accumulated impressive foreign currency reserves. In 2015 Chinese reserves reached $4 Trillion and since then have been falling as China has sought to support a falling Yuan. According to Trading Economics reserves are down to $3.16 Trillion as of September of 2016. Bloomberg reports that Chinese reserves fell $80 Billion more in October. They suggest that China could be due for a shock fall in foreign exchange reserves.

Thus for the average investor the Chinese infatuation with bitcoin may have a much to so with protecting previously gained wealth as with gaining new. However as high speed traders conquer the bitcoin market they introduce a measure of risk for those who simply want their assets in a non-Yuan currency. We are reminded of the dot com bubble and the 2008 market crash in the USA caused by investors chasing higher and higher priced assets until in each case the bubble burst. Most high speed traders will be watching the market and will be able to exit quickly in case of a crash, trading for profit as the market falls just as they did during the bitcoin’s ascent. It will be the mom and pop investors who were stung by real estate and then the Chinese stock market who will probably be hurt the most. In the meantime is this something that you want to do? If so you need to constantly pay attention, invest in high speed software and hardware and up your appetite for risk!