Automated trading is both a boon and a curse for exchanges of all kinds. On the one hand, “bots” greatly reduce the amount of time and attention needed to implement a trading strategy. A well-programmed bot can, in theory, be earning a profit on even marginal trades, 24-hours a day, and for completely logic-driven reasons that are essentially indistinguishable from a human’s. Bots can also make those decisions and enter orders at lightning-fast speeds, giving their owners a stark advantage over traditional human decision makers. On the other hand, bots are only as good as their designers. When they fail, they can do so catastrophically, making decisions even the most bone-headed human would easily avoid.
If a theory posted to day to the Bitcoin Markets Reddit is true, today’s seemingly inexplicable price drop from around $501 to $471 is largely the result of a bot gone bad. The behavior was first noted by bitcoin trader “nobodybelievesyou”, who realized that the price was falling on the BTC-e exchange even as overall volume and frequency was skyrocketing. Widely seen as a second-tier exchange, BTC-e generally has a fraction of the trading volume of sites like Bitfinex and BitStamp, yet today’s trading was on BTC-e was nearly double that of Bitfinex and BitStamp combined.
It’s not clear if this is the result of one misbehaving bot, or multiple bots with complementary flaws reacting to each other. In a perspective piece about this weird event, CryptoCoinsNews noted that this probably isn’t the result the bots’ owners were hoping for, but that it’s definitely a payday for BTC-e. With 0.2 to 0.5% fee charged on every trade, BTC-e has likely made around $50,000 from the fiasco thus far.
While it is possible that there is some other, yet-unknown and fundamental reason for today’s price drop, the most likely result of today’s events as normal trading returns on Monday (Tuesday in the U.S., due to Labor Day) is a steady climb to pre-bot conditions and prices. This means that one bot may well have cost its owner millions, and provided other traders with a rare opportunity to grab discounted bitcoin during a weekend fire sale.