Humans vs Bot Investors: Identifiable Behavioral Differences

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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