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Four Ways AI Will Transform Cryptocurrency

by Kristina Drye, on Nov 18, 2021 12:49:52 PM

Crypto1

The topic of cryptocurrency is no longer new - it is here, and it is here to stay. While cryptocurrency does not require the use of artificial intelligence and machine learning to exist and to operate, there are four primary ways that AI and crypto will work together in the coming decade. 

Price Prediction and Forecasting: 

Many factors impact the value of cryptocurrencies like Bitcoin. Indicators include supply chains, demand, market volatility, investor dynamics, and social or political trends. Forecasting and price prediction are necessary for a currency as volatile as cryptocurrency. Many different models of AI can be employed to predict price, making trading and investor activity that much more stable. 

Automated Trading: 

Like any asset, cryptocurrency is traded and sold. Though decentralized and unregulated, cryptocurrency is no longer relegated to the deep and dark web. Major institutions are now embedding cryptocurrency options in their operations, and the same technology that enables cryptocurrency and blockchain also enables non-fungible tokens (NFTs), another form of digital asset. Like other assets, trading is mechanized for efficiency and speed. AI can help automatically trade cryptocurrency as part of investment portfolios, much like stocks today. 

Risk Prediction-Volatility:

Unlike other forms of currency, cryptocurrency is volatile. This means its value can fluctuate over time. For cryptocurrency, this is in part because it is decentralized and unregulated. The same things that make cryptocurrency unique are also what make it a high-risk investment. AI can help with this. Using machine learning, volatility in price can be predicted and managed, with volatility being predicted in intervals as small as an hour. 

Risk Prediction-Compliance and Illicit Activity:

The most important way AI will transform the cryptocurrency landscape is in the ways it can impact compliance and regulatory operations, and ensure ethical use of currency. All currencies represent economic activity and transaction of goods- therefore, cryptocurrency is not immune to illicit or nefarious activities. Though highly volatile, its unregulated and decentralized nature, coupled with its notorious anonymity, make it a more attractive option for criminals and fraudsters. AI can help with this. Using transfer and federated learning, AI can sort publicly available data to assess risk of transactions and transactors. Because AI learns patterns and recognizes anomalies, it can detect fraud, corruption, and other activities like trafficking or money laundering. This is good for two reasons: First, it reduces risk to an institution’s compliance and regulatory requirements; and second, it removes bad actors from environments, making them safer and more secure. Lastly, while privacy and anonymity are attractive selling points of cryptocurrency as an option for transaction, they can make identifying illicit activity very difficult. Using AI and its ability to scour public information for de-anonymization, criminals hoping to use cryptocurrency to stay hidden will find it more difficult than anticipated to break the law. 

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