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How to Best Navigate Artificial Intelligence for Crypto Trading [2024]
Investing 101
May 14, 2024

How to Best Navigate Artificial Intelligence for Crypto Trading [2024]

As artificial intelligence (AI) continues to revolutionise industries around the world, it appears that crypto traders are also leveraging AI's capabilities; with some having already reported enhanced analytical depth and operational efficiency. 

However, AI in crypto trading goes beyond just operational efficiency and analytical depth, and what some crypto traders and engineers are currently working on is the development of AI models to predict future price movements. Given how some studies have already shown AI-based models to have higher predictability than econometric models, this development could be a game changer.

But for now, it's perhaps best to look at how crypto traders can navigate AI (in its current form) in the best way possible.

Let's dive right in!

The Evolution of AI in Crypto Trading

AI technology has evolved significantly over the past few years, and this can especially be seen within finance. Traders and portfolio managers have gone from simply using AI to execute predefined strategies, to leveraging machine and deep learning models to create powerful trading insights.

When it comes to AI in crypto, the use of AI was first popularised in 2023 when AI crypto trading bots were used to generate technical analysis indicators; such as moving averages and RSI. However, as of 2024, AI crypto trading utilities have become more sophisticated, practical and accessible, and an increasing number of crypto projects have shifted their focus to concentrate on building AI prediction products for the crypto space. 

Yet although advancements have been made, it is important to note that AI still has a way to go in this regard, and being aware of current limitations is essential. 

Debunking AI Trading Myths

While AI has the potential to revolutionise crypto trading, it's important to remember that it's not a magic bullet. AI models can still be prone to errors, and over-reliance on AI can lead to significant losses; as this often leads to inflated expectations and risky trading behaviours. 

Surprisingly, there are AI cryptocurrency trading products that purport to be infallible when it comes to predicting, which not only is not true, but highly irresponsible. The fact of the matter is that AI systems are still in their infancy, and are only as good as the data fed into them and the algorithms they are based on. So while AI in its current form is very good at estimating probabilities based on historical data, it isn't at a level (yet) where it can counter or mitigate the unpredictability of human behaviour, or place value on important intangibles. 

Another misconception is that AI crypto trading bots are tools that allow you to set instructions and forget the rest. While it is true that AI can automate tasks and provide valuable insights, it still requires some human oversight and adjustment (albeit from a place of experience). The qualitative side of crypto is ever-changing, and requires experienced traders/investors to analyse; seeing how AI currently cannot. 

Tips for Navigating AI in Crypto Trading 

As can be seen, while AI can enhance decision-making in trading, its predictive accuracy is not yet infallible, and therefore it is advisable to use it as an accompanying tool when crypto trading or investing. 

Below are some tips on how to best navigate AI for crypto trading:

1) Choose the right AI tools 

There are many AI-powered tools available for crypto traders, each with different features and capabilities. Some platforms specialise in technical analysis, while others focus on sentiment analysis or portfolio management. So conducting thorough research into tools that align with your trading style and goals is fundamental!

In order to ensure you choose the best AI tool, you should first research the company behind the product. Look for things such as how long they've been in business, their track record in the industry, and any notable achievements or recognition they have received. Also, ensure that the AI tool complies with relevant financial regulations and data protection laws. 

Next, consider checking social media, forums and professional networks to gauge retail sentiment. You should look for authentic and nuanced posts as opposed to generic promotional posts. Once you have a rough idea of the general sentiment, look for some detailed reviews that discuss both the strengths and weaknesses of the tool, and see if this lines up with your previous research.  

Last but not least, reputable tools often provide clear information on how their AI algorithms work, the data they use, and the logic behind their analysis and predictions. Beware of tools that make vague claims or do not offer detailed explanations of their methods.

2) Start with a demo account

Many AI trading platforms offer demo accounts, allowing you to test their features and strategies with virtual funds. This is a great way to familiarise yourself with the platform and assess its effectiveness before risking real money.

In other words, using a demo account allows you to experiment and see firsthand how the AI tools perform during different market scenarios. This direct exposure helps you understand the practical applications of the tools and their potential limitations. It’s also an invaluable way to gain confidence in handling the platform before committing real capital.

3) Define clear trading rules 

Before employing AI tools in crypto trading, it's essential to define clear trading rules that guide when to enter and exit trades, the levels for setting stop-losses, and the amount of risk you are willing to take on each trade. These parameters should not only align with your financial goals but also with your risk tolerance and trading style. Establishing these rules upfront helps in structuring your trading activities and provides a framework within which AI can operate effectively.

Setting clear trading rules also includes deciding on the percentage of your portfolio to allocate to different trades based on the volatility and performance of specific cryptocurrencies. This strategy helps in managing potential losses and capitalising on gaining positions effectively.

4) Backtest strategies

Many AI platforms allow you to backtest your strategies using historical data. This can help you evaluate the potential effectiveness of your strategies and identify areas for improvement.

So by backtesting, you can refine your strategies, adjust your risk parameters, and improve your trading decisions without exposing yourself to actual financial risk. This step not only tests the viability of your strategy but also helps in understanding the AI tool's functionality in different market scenarios.

5) Combine AI with human expertise

AI is a powerful tool, but it's not a substitute for human experience and judgment. The most successful traders combine AI insights with their own knowledge and intuition to make informed decisions.

But it is important to note, that while this combination is superior to solely using AI, there is still no guarantee that this combination will yield positive results. For this reason, it is recommended that crypto traders diversify their portfolios across different cryptocurrencies to mitigate risk, and crypto strategy platforms like ICONOMI are an excellent solution for this and can bring about additional revenue through the fees generated by people copying portfolio strategies. 

6) Stay informed with the latest developments

Last but not least, it is strongly advisable to keep up-to-date with the latest developments in AI and crypto trading. New tools and strategies are constantly emerging, and staying informed can give you an edge in the market.

This can be done by regularly reading industry news, attending in-person seminars, and webinars or joining in forum conversations related to cryptocurrency and artificial intelligence.

What the Future Holds for AI and Crypto Trading

As we look to the future of artificial intelligence in crypto trading beyond 2024, it's evident that the technology will become even more integrated and crucial in financial markets. The AI-driven models that are starting to emerge are expected to evolve significantly, becoming more sophisticated and capable of processing vast amounts of data in real time. These advancements will likely enhance the accuracy of market predictions and expand the scope of automated trading strategies.

But as of right now, the combination of expert human intuition and advanced AI analysis is still key to crafting successful, dynamic trading strategies. What's more, some researchers believe that future regulation may be more favourable to AI portfolios with human oversight; meaning human oversight could still have an important part to play in the future.

Either way, AI has compelling benefits for crypto traders that should not be ignored, so experimenting with this exciting technology (in a safe manner) is definitely something to consider. 

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