Bitcoin Increasingly Dominated By High Speed Traders

Bitcoin has far more traders these days — particularly in China — than it has true believers.

“It’s the golden age to be in the bitcoin market, because it’s imperfect,” said Zhou Shuoji , a former IBM technology consultant whose firm, Fintech Blockchain Group, runs a bitcoin hedge fund and venture capital fund.

While the most common associations one might have with bitcoin are drug dealers, libertarians and Chinese nations looking to send funds overseas — according to recent reports, speed traders armed with cutting edge tech are now driving some 80 percent of the bitcoin trading market. Much like their Wall Street counterparts, bitcoin speed traders buy and sell bitcoin as a quick click, and make their margins in the tiny price discrepancies (that they are largely creating).

What is harder to assess is how much money those high speed bitcoin traders are making, since among the appeals of the area is that the vast majority of such traders don’t actually have to disclose their performance data. Chinese banks officially said no to bitcoin in 2013, and various capital control rules keep foreign presence small.

Chen Zhenguo, founder of China’s largest platform for facilitating automated bitcoin strategies, says he has brought in annualized gains of 50 percent for his own account (though he has declined to independently verify those figures).

“Bitcoin has a natural advantage when it comes to automated trading,” said Chen.

How long that advantage will remain, however, is an open question. Bitcoin’s big price swings have scared off some speed investors, and there is an increasing concern that the Chinese government is about to come down hard on bitcoin. Chinese officials are dubious about bitcoin given its uses as a vehicle to skirt capital control regulations in the nation. Central bank officials conducted on-site inspections at some of the biggest bitcoin exchanges this month, looking for evidence of violations like money laundering.  Similar scrutiny of stock-index futures in 2015 led to trading restrictions that cut volumes by 99 percent.

Chinese traders, however, are not moving money and are instead focused on cross-exchange arbitrage, said Arthur Hayes, a former market maker at Citigroup Inc. who now runs BitMEX, a bitcoin derivatives venue in Hong Kong. OkCoin, one of China’s three biggest bitcoin exchanges, estimates 60 percent of its transactions are executed by automated traders, while Huobi and BTC China put the figure at around 80 percent.

Chinese exchanges typically do not charge transaction costs — instead, they take their cut in the fee clients pay to withdraw bitcoin from their accounts. Exchanges also offer services including co-location and margin trading.

As for today — speed traders are by and large sticking with bitcoin.

“If the market is here and I can see a chance to make money, I will,” Zhou said. “If the market is gone, I’ll just walk away.”


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