The price of Bitcoin (BTC) has become increasingly stable over the last few months, and has been trading in a range between $9,000 and $9,900 since the beginning of June. This is quite unusual for Bitcoin (BTC), since Bitcoin (BTC) is typically one of the most volatile asset classes. A new theory proposes that Bitcoin’s (BTC) new-found stability is due to high-frequency crypto trading.
Essentially, an increasing amount of institutional traders have entered the market, and they are deploying the same strategies they use on the stock market to make guaranteed money.
For example, traders are performing cross-exchange arbitrage and cross-pair arbitrage to make small percentage profits, but these are guaranteed profits, and if using large amounts of money these small percentages can yield big money.
This sort of high-frequency arbitrage acts to stabilize the price of crypto, both through ensuring that the price of crypto on different trading pairs and different exchanges is roughly equivalent, and also through injecting lots of liquidity into the crypto markets.
Basically, in order to conduct profitable high-frequency trading lots of money is needed, and this drastically increases the liquidity in the crypto space.
Previously the crypto space had relatively low liquidity, and this is what led to high volatility, since any large buy or sell order could cause a rapid jump or drop in price. Now that there is lots of liquidity due to high-frequency traders, large buy or sell orders have a much smaller effect on the market.
In other words, high-frequency traders have brought lots of liquidity into the crypto market, creating sufficient liquidity even for larger orders, and this results in larger orders being fulfilled without rocking the market.
Zooming out, the crypto space has been maturing long term, especially as institutional investment increases, and as the crypto market matures it is behaving more like traditional asset classes such as the stock market and gold, so there is more volume, more liquidity, and less volatility.
Therefore, the current lack of volatility in the crypto market may not be temporary, it could be a permanent feature of the crypto markets. This doesn’t mean there won’t be major price movements at times, but it does mean that major price movements could happen far less often.