The Hype Trap: Crypto Exchanges and AI Trading Bots
This article by Ben Caselin, was originally published on Hackernoon.
In my capacity as CMO of a crypto exchange, I often get asked about our plans for AI trading bots. Recently, I had the opportunity to speak at Taipei Blockchain Week, where this year the focus was on AI, and I got asked this very question. It's a fair question, given that both AI and crypto are on the rise, but the question is also presumptuous.
Undoubtedly, the intersection of these two fields is exciting: AI can enhance fraud detection, optimise liquidity provision, and even analyse market trends in ways that were once unfeasible. But when it comes to crypto exchanges offering proprietary AI trading bots directly to retail users, I urge caution. This isn't about rejecting AI. It's about avoiding hype-driven decisions that could undermine user trust and autonomy in the long run.
At VALR, we provide a robust API—we serve high-frequency traders who deploy all types of algorithms, and they are free to deploy AI strategies as well if they wish to do so—but building in-house AI trading bots raises serious concerns about potential conflicts of interest, regulations, and long-term value.
The Appeal of AI Bots – and Their Limits
AI's rise in finance is undeniable. Tools powered by large language models and neural networks can process vast amounts of data, spot patterns in price charts, and execute trades faster than any human. In crypto, where volatility is the norm, this sounds like a game-changer. Imagine a bot that uses technical analysis—or even sentiment from social media—to buy low and sell high, potentially boosting returns for novice traders.
But this overlooks key drawbacks. AI bots rely on probabilistic models, which excel at short-term predictions based on historical data but often falter in unpredictable markets. Crypto isn't just about charts; it's influenced by global events, regulatory shifts, and sentiment that no algorithm can fully anticipate with certainty. Would an AI bot hold Bitcoin through a decade of volatility or chase short-term gains? History shows that strategies like this work until they don't—think of all the quant funds that imploded during market crashes because their models couldn't adapt.
Moreover, pitting AI against AI creates a zero-sum scenario. If every exchange offers bots with similar capabilities, trading becomes a battle of computing power at best. Those with more resources—big institutions or wealthy users—gain an edge, turning crypto back into an elitist arena. For retail investors, it could devolve into gambling: pick a bot and hope for the best. This isn't empowerment; it's a distraction from building genuine financial literacy.
Conflicts of Interest in Exchange-Led Bots
Crypto exchanges make money from trading fees, custody, and other services. That's transparent and aligns with providing a fair marketplace. But introducing proprietary AI bots changes the dynamic. If an exchange's bot encourages frequent trading to generate fees, whose interests does it serve—the user's or the platform's?
In traditional finance, robo-advisors from banks might prioritise products that benefit the institution. In crypto, this risk is amplified. Offering a bot that trades on behalf of users could blur lines between an exchange and an investment advisor, inviting scrutiny. Are we equipped to handle the fiduciary duties that come with that? Specific tools like grid trading or dollar-cost averaging are fine—they're transparent strategies users can understand and control. But opaque AI bots that decide on your behalf? That's a step towards managed accounts, which many exchanges aren't licensed for.
Regulations add another layer of complexity. Crypto is already navigating a patchwork of rules worldwide. In South Africa, where VALR operates, we're licensed as a financial services provider, but AI-driven trading could trigger further requirements under investment laws. Globally, bodies like the SEC in the US have flagged automated trading as potentially akin to securities offerings. Rushing into bots without clarity could expose platforms and users to legal risks. Better to focus on infrastructure: deep liquidity, secure APIs, and tools that let users integrate third-party AI if they choose.
Empowering Users, Not Replacing Them
At its core, crypto is about decentralisation and self-sovereignty. Exchanges should enable that by giving users optionality, not by automating decisions away. Our API supports high-frequency traders who build custom algorithms, including AI ones, because we believe in user-driven innovation. This approach keeps control in users' hands, fostering skills like risk management and strategy development.
AI does have a role in efficiency—automating tedious tasks like compliance checks or portfolio rebalancing frees up time for smarter decisions. It can even complement human judgement in areas like trend spotting. But over-relying on bots could erode that judgement, which is crucial in a field as dynamic as crypto. Developing personal capacities, like understanding market fundamentals, is far more rewarding than outsourcing everything to code.
This isn't to say exchanges should never explore AI products. If done right—with full transparency, user consent, and regulatory compliance—they could add value. But we must prioritise long-term trust over short-term hype.
Lessons from Blockchain's Hype Cycle
Remember the pre-ICO era, when every company was grilled on their "blockchain strategy"? Many shoehorned it in unnecessarily. AI risks a similar fate in crypto. Just because the technology exists doesn't mean every exchange should roll out bots. We need critical thinking: does it solve a real problem, or is it buzzword-chasing?
AI and crypto can complement each other powerfully, from better analytics to streamlined operations. But for trading bots, exchanges should tread carefully to avoid conflicts, regulatory pitfalls, and diminished user agency. Crypto exchanges ought to be committed to building tools that empower, rather than extract. Let's embrace AI thoughtfully, ensuring it serves the community rather than the other way around.
Author
Ben Caselin is Chief Marketing Officer at VALR.com, the Pantera-backed crypto exchange. Headquartered in Johannesburg and the largest exchange by trade volume on the African continent, VALR serves over 1700 corporate and professional investors and more than 1.5 million traders worldwide. Drawing on years of experience in the digital asset space, mostly in Hong Kong, Dubai and now South Africa, Ben focuses primarily on driving the adoption of bitcoin in emerging markets and advocates for an approach to innovation on the basis of spiritual principles.
Risk Disclosure
Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate.
VALR (Pty) Ltd is a licensed financial services provider (FSP #53308).
Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
