Professional traders using high-speed, automated trading are now responsible for 80% of bitcoin trading, according to Bloomberg. Bitcoin offers arbitrage opportunities across different exchanges, zero transaction costs on the Chinese venues hosting most of the activity, round-the-clock trading, and co-location services allowing participants to align their servers with exchange servers.
Profiting From an ‘Imperfect’ Market
Zhou Shuoji, a former IBM consultant now operating Fintech Blockchain Group, a bitcoin hedge fund and venture capital fund, said that through automated, 24-hour-a-day trading, his firm is able to profit from tiny discrepancies in the myriad venues through which bitcoin changes ownership. He said the bitcoin market presents a “golden age” because it is imperfect.
The majority of traders are not required to disclose their profits. The government prohibited Chinese banks from trading bitcoin in 2013. Foreign firms that may be more likely to disclose earnings have a small presence on Chinese exchanges due to government capital controls.
Chen Zhenguo, a trader who founded the country’s largest platform for facilitating automated bitcoin strategies, said he has realized 50 percent gains for his own account. He did not provide information to verify his claims.
Chen, whose company, BotVS, allows clients to run live trials of bitcoin algorithms on 23 exchanges, said bitcoin has a natural advantage in automated trading. Bitcoin gained 6.9% to $890.77 at 10:18 a.m. in London.
How Long Will It Last?
The rising dominance of professional traders raises the question of how long the high-profit opportunities will continue.
Bitcoin’s price volatility has deterred some high-speed firms.
In addition, concern exists about the impact of China’s regulatory crackdown. The central bank recently conducted on-site inspections of major bitcoin exchanges in search of evidence of violations such as money laundering and market manipulation. Such scrutiny of stock index futures resulted in trade restrictions that reduced volumes by 99% in 2015.
Officials could, however, decide bitcoin is too small of a market to warrant intervention. The market value is around $13.5 billion compared to $6.5 trillion for Chinese equities.
Most of China’s automated traders focus on cross-exchange arbitrage, according to Arthur Hayes, a former Citigroup Inc. trader who currently operates BitMEX, a Hong Kong-based bitcoin derivatives venue.
Automated traders can transact multiple times per second and react to price changes caused by speculators who use technical patterns to guide buying and selling decisions, according to Hayes.
Chinese Exchanges Confirm the Trend
OKCoin estimated 60% of its transactions are done by automated traders. BTC China and Huobi estimated that figure at 80% for their trades.
Neil Woodfine, COO of Remitsy, a cross-border payment system, said China has around 10 major bitcoin venues, with most trades conducted by the top three.
Rather than charging transaction fees, Chinese exchanges levy a fee on withdrawals. They also provide co-location and margin trading services.
Zhou of Fintech Blockchain Group sees more long-term potential in the distributed ledger technology that supports bitcoin than in bitcoin itself. He said he cannot predict what will happen in the market in a few years as the market is still young and is subject to regulation. But for the time being, he will continue to trade.