Can AI-Driven Prediction Address Cryptocurrency Volatility?

Crypto investing is not for the faint of heart. Many coins rose to all-time highs from December 2017 to early February this year. However, the market also saw prices go from these highs to down by more than half. Bitcoin saw a drop of more than two-thirds from its highest point and other coins even had it worse. Many new crypto investors who came in unfamiliar with cryptocurrencies’ volatility were left shaken by how rapidly and significantly the prices of coins changed.

Even on good days, cryptocurrencies experience high volatility. In fact, it is what makes crypto trading more lucrative than other forms of investing. Double-digit swings within a day are common. Savvy traders can take advantage of this for substantial daily returns. This has been largely due to the fact that the crypto market is still highly speculative.

Many of the coins being traded on exchanges were made available through initial coin offerings or ICOs. Since ICOs have been conducted to quickly raise capital, many of the companies behind these coins have yet to actually come out with working products and services. The prices aren’t exactly based on fundamentals. Even the “joke currency” Dogecoin has more than $800 million in market cap as of this writing.

Predictive analytics firm Endor co-founder and leading data science expert Prof. Alex Pentland shares, “The world is becoming full of coins and we see a future where everything is tokenized. And a good question is, ‘Is that going to be a crazy world where when you order coffee, by the time you pay for the coffee, it’s ten times the price you thought?’ Or is it going to be something where it’s a little smoother and more predictable?”

The success of crypto activities partly hinges on investor and consumer adoption. But if many are intimidated by volatility, this can be quite the predicament to the crypto landscape. Addressing volatility could help improve encourage more people to participate in crypto activities.

AI-Driven Predictive Analytics

Making sense of highly speculative markets can be a challenge but these markets are also human driven. If one looks hard enough, patterns would eventually emerge especially if there are large enough data sets to examine. Patterns are predictable. Fortunately, there are advances in data sciences and behavioral analytics that could help make sense of these human driven data.

With the help of artificial intelligence (AI), it’s now possible to go through large volumes of data and generate accurate predictions. If there are mechanisms that could help analyze and anticipate where crypto markets are heading, it could provide some normalcy to the activity. Predictions can help ease the effect of emotions like hype and fear that greatly affect market prices.

Prof. Pentland adds, “I think the key to [a predictable market] is knowing enough about the market, market analytics, that you can do arbitrage on markets. “

As such, services like Endor are now foraying into crypto activities. After successful developing their AI-driven prediction technology for enterprise users, Endor now seeks to enable wider adoption through a blockchain-driven protocol. Users can simply input a question about the market and immediately receive a prediction. By using the blockchain, it hopes to develop a community of users, data providers, and developers who could help sustain an ecosystem that enables users to use this technology.

Endor’s protocol also allows for the analysis of blockchain data which could lead to rich insights about the crypto market. The Bitcoin blockchain has recorded around 300 million total transactions. Ethereum has over 160 million. Given such volume of data, it is possible to analyze transactional patterns and even correlate these patterns with other data sets. This could help generate insights on people’s trading behaviors and how certain actions impact prices and volatility.

Analytics could also expose behaviors detrimental to the crypto space. For instance, the technology can help track questionable transactions and perhaps lead to the capture of cybercriminals. Due to the pseudo-anonymous nature of blockchain and cryptocurrencies, criminal syndicates have used them to facilitate illegal transactions and to launder money. This use of cryptocurrencies for crime has somehow tainted crypto activities and has compelled governments to accelerate regulation of the market. Perception and regulation can all have great effect on prices.
Solving Volatility

Volatility is a multifaceted issue that may require various approaches to address. There are measures other groups are taking to address volatility. Stablecoins are also making headway in their attempts to offer low-volatility crypto tokens. These tokens are pegged to the value of fiat currencies which traders can use to park their investments. Additional mechanisms that promote less volatility in the market are all welcome developments.

The strength of blockchain-based AI-driven prediction in this case is that it is decentralized, unbiased, and accurate. This helps encourage ordinary consumers and investors to trust the technology and use these predictions to drive their decision-making. A market that’s less susceptible to hype and frenzy could help bring stability into the crypto landscape.