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Humans vs Bot Investors: Identifiable Behavioral Differences

by CryptoDataDownload


Behavioral Bias Study Focus
Research continues to be published that analyzes different components of the cryptocurrency ecosystem. In this study, investor behavior on the Ethereum network is in focus. The researchers segment investor profiles into two main categories: human traders and "bots". Bots are automated trading solutions that execute based on a pre-set of conditions, and in this study, "bot wallets" are classified as those wallets making more than 50 transactions per day. The researchers are able to link wallets on the Ethereum blockchain to trading transactions across multiple decentralized exchanges (DeFi). Once the wallet is linked to transactions, there are 7 main metrics (both derived and factual) that are quantified:

    1) Proportion of gains to losses
    2) Frequency of Trading activity over set number of days
    3) Ratio of trade frequency to profitability
    4) Size of wallet
    5) Average realized return of transactions
    6) Standard deviation of investors' returns
    7) Average number of daily trades made by wallet.


Research Findings
While some of these findings are similar to what is observed in traditional financial markets, human investors outperforming bots is a surprise finding. Since the general "retail" crowd of cryptocurrency investors is on centralized exchanges (ie. Binance, Coinbase, Gemini etc), it takes a specially informed investor to trade on DeFi exchanges. You might wonder ... Do these investors have access to information that retail investors do not?

  • Wealthier investors appear to be more confident and trade more often. Confidence is measured as ratio of trading frequency to profitability. So in this case, bigger wallets do not mean higher profitability.
  • As trading frequency increases, profitability in returns goes down
  • Human investors outperform trading bots in the transactions studied
  • Bot trading is statistically different than human trading on every metric in the study


    • Huang, Zhenhan and Tanaka, Fumihide, Behavioral Biases of Cryptocurrency Investors (November 18, 2022). Available at SSRN: https://ssrn.com/abstract=4280610 or http://dx.doi.org/10.2139/ssrn.4280610




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    THE PERFORMANCE OF TRADING SYSTEMS IS BASED ON THE USE OF COMPUTERIZED SYSTEM LOGIC. IT IS HYPOTHETICAL. PLEASE NOTE THE FOLLOWING DISCLAIMER. CFTC RULE 4.41: HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. U.S. GOVERNMENT REQUIRED DISCLAIMER: COMMODITY FUTURES TRADING COMMISSION. FUTURES AND OPTIONS TRADING HAS LARGE POTENTIAL REWARDS, BUT ALSO LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THE FUTURES AND OPTIONS MARKETS. DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES OR OPTIONS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS WEBSITE. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
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