10th July 2022 > > Sunrise.

tl;dr

Artificial intelligence (AI) bots and leverage can be a toxic cocktail.

Market Snap (at time of writing)

Market Wrap

BTC has threatened a breach of $22k a few times in the last few days, but there doesn’t yet seem to be much appetite for a strong reversal of recent weakness. Perhaps if we can go a week without another centralised platform announcing financial woes then sentiment might improve.

Occasional Series – It’s goodbye to the swimming pool …

Curious Cryptos’ Commentary – Uprise

Korean firm Uprise is one of a host of similar ventures that take in client’s money to use as collateral for trading in cryptocurrency futures using artificial intelligence (AI).

All these firms claim that their AI-enabled technology leads to superior trading outcomes, with some even stating that 100% of their trades turn a profit.

Putting aside the outright scams who simply take your money and pretend to invest it on your behalf (always with outstanding results to encourage further investment until you try and fail to take any money out) I have always been very sceptical of such trading schemes.

My scepticism comes about for two reasons.

Firstly, I remain convinced that using leverage (all futures trades are by nature leveraged) for trading cryptos is a quick route to large losses for most, but admittedly not all, investors due to the inherent volatility of this asset class.

Secondly, it seems obvious to me that if someone had invented a fool-proof AI trading bot, then they would simply keep it to themselves and make themselves very rich in a very short space of time. That would be the only sensible course of action unless the AI trading bot is not infallible after all.

I do know several people who have invested in such funds, with varying degrees of success. If you think I am painting a picture which is at odds with your experience of AI-enabled trading bots, the CCC community would love to hear about it.

…

Sunrise demonstrates the potential pitfalls of AI-enabled bots working in tandem with leverage.

During the recent Terra fiasco, the original LUNA coin – now rebadged as LUNC, Luna Classic – went from $90 to less than 0.006 cents in just one week, causing massive financial destruction along the way. This event was arguably the single biggest factor in crypto price weakness for the last two months.

During this week’s sell-off, Sunrise was short LUNA all the way down which sounds like a great trade, which indeed it would have been if the fund had borrowed LUNA, with a large bag of collateral, to sell into the spot market. That trade, held for just a few days during that week would have made out like a bandit.

However, markets never go in a straight line, and the price corrections against the prevailing trend will be rapid and violent, posing outsize risks to leveraged futures players, a fact very apparent to any person with a modicum of trading experience, but not visible it seems to Sunrise’s AI bot.

At the end of the sell-off, though the Sunrise fund has been short LUNA during the time the coin dropped precipitously from $90 to effectively zero, clients of Sunrise lost 99% of their funds.

Yep, you read that right. A winning trade idea led directly to a capital wipe out. How is that even possible, I hear you ask.

Well, simply because each brief yet sharp respite from the sell-off led to immediate liquidation losses, which the bot then chased before the next price reversal. Margin calls requiring tight stop-losses will always result in loss after loss in a highly volatile environment.

Losing 99% of capital by being right overall on one of the quickest and most dramatic price collapses of all time beggars belief.

What a waste.