AI-Powered Portfolio Management in Crypto – Optimizing Diversification for Long-Term Success – The Daily Hodl

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The birth of Artificial Intelligence (AI) is credited to the Dartmouth Workshop in 1956, where the idea of creating intelligent machines was discussed.

In 2010, deep learning a subset of machine learning rose to prominence. Deep learning has gained significant attention in recent years from investors.

AI-powered machines have the ability to analyze large amounts of data, identify complex patterns and make data-driven predictions fast.

It’s worth noting that deep learning and pattern recognition algorithms are trained by analyzing large amounts of data.

However, analyzing past market performance is not always a good predictor of the future as market conditions often change.

Investors and financial institutions combine deep learning with traditional human-made analysis to gain advantage over competitors.

AI-powered portfolio management

Deep learning algorithms excel in optimizing portfolio allocation by taking into account various assets, historical performance data and a spectrum of risk factors.

Their primary objective is to create portfolios that either maximize returns or align with specific investor objectives. AIs are also used for rebalancing portfolios.

AI-powered systems automate portfolio rebalancing by continually tracking asset performance and analyzing deviations from target allocations.

This seamless process ensures that the portfolio remains in line with the intended risk-return profile.

In addition to portfolio management, AI-powered algorithms aid in assassin risks, analyzing market sentiment and conducting predictive technical analysis.

Deep learning plays a pivotal role in assessing and effectively managing investment risk.

AI is actively used for sentiment analysis by examining social media, news and other information sources to gauge how public opinions may impact asset prices.

This information is important for making investment decisions.

Crypto markets and the AI

Cryptocurrency markets, or often referred to as crypto markets, are financial markets where digital assets are bought, sold and traded (by the speculators).

Cryptocurrencies are digital currencies that use cryptography for security and operate on blockchain technology.

Blockchain technology is similar to a digital ledger that’s not governed by a single person or company. Instead, it’s shared on many computers.

It was first used for Bitcoin (BTC), but it can do much more.

Blockchain technology is used not only for financial transactions but also for administering voting systems.

The crypto markets have become a fertile ground for the application of AI in various ways, such as price prediction, algorithmic trading, risk management, fraud detection, sentiment analysis, portfolio management and cybersecurity.

Pros of investing in crypto

Passive and active investing in crypto assets offers several benefits. Let’s discuss the main ones.

Crypto markets are highly volatile and therefore offer high potential returns. On the other hand, risks are also increased.

As an example, BTC and other altcoins have experienced outstanding price increases over the past few years.

Investing in crypto helps investors diversify their portfolio, as it doesn’t directly correlate with traditional financial markets.

Crypto assets such as coins and crypto CFDs (Contracts for Difference) are easily accessible to most investors, allowing global participation in the market.

Traders do not need to go to traditional financial institutions to purchase crypto coins.

Cryptocurrencies are actively traded 24/7, and this means that trading these assets is flexible and convenient for many people.

It should be mentioned that FX trading is only available 24/5, and stock trading is only available during exchange market active hours.

It’s safe to say that crypto assets are the most accessible assets in the world.

There are low barriers to entry when it comes to investing in crypto as many brokers and exchanges offer leverage.

The cryptocurrency ecosystem is a breeding ground for innovation, constantly giving rise to novel projects and technologies.

Early investments in these innovative endeavors can yield substantial rewards and returns.

When investors purchase crypto coins, they hold direct ownership and control over their assets, without depending on the intermediaries such as banks.

Many investors view crypto assets as a hedge against inflation, similar to gold. Central banks have no control over issuing crypto assets.

Cryptocurrencies are mined by solving complex computational problems.

Crypto coins enable individuals to make international transactions quickly and without adding any transaction costs.

However, there are risks associated with cryptocurrency transactions, and we’ll expand on this topic below.

Cons of investing in crypto

The main risk when it comes to investing in cryptocurrencies is that crypto assets are highly correlated with one another. The main driver is the price of Bitcoin.

Crypto correlation refers to the degree to which the prices of different cryptos move in relation to each other.

Keep in mind that investing in various highly correlated crypto assets reduces diversification.

In other words, investors might believe that they have put their eggs in different baskets, while all of these eggs end up in the same basket.

As already mentioned, crypto assets have high volatility, which increases risks.

Prices can fluctuate dramatically over a short period of time, leading to significant gains or losses.

The highly volatile nature of crypto markets can be challenging for risk-averse investors.

Crypto markets are still largely unregulated. This lack of clear regulation can lead to uncertainty, fraud and challenges related to investor protection.

Crypto frauds and scandals can have a negative impact on your investment portfolio. For example, on November 11, 2022, FTX’s CEO stepped down and the company filed for bankruptcy.

Following the FTX scandal, the founder and CEO of the company Sam Bankman-Fried was arrested in the Bahamas and extradited to the USA in December 2022.

The FTX scandal has damaged the crypto sector as well. During these events, crypto markets lost billions of dollars.

In addition, frauds and scandals in the crypto industry damage the investor confidence.

Crypto wallets and crypto asset holders are under constant attacks from hackers and scammers.

We’ve mentioned in the pros above that crypto transactions are fast and do not require middle intermediaries such as banks.

However, this advantage can easily become a downside if investors get scammed.

Many people believe that cryptocurrencies lack intrinsic value and are driven solely by speculation. The main argument is that crypto assets are too volatile to use as regular currency.

New regulations and government actions can have a significant impact on the value of cryptocurrencies.

To sum everything up

In summary, AI-powered portfolio management in cryptocurrency offers advanced tools for diversification and long-term success.

Deep learning excels in portfolio optimization and automates rebalancing existing investment portfolios.

AI-powered algorithms aid risk assessment and sentiment analysis for investment decisions.

Cryptocurrency markets provide fertile ground for AI applications, yet they come with risks, such as volatility and regulatory challenges.

Notably, the FTX scandal in 2022 underscored regulatory and security concerns.

Despite advantages, the correlated and speculative nature of crypto assets calls for careful risk management. Regulations and government actions can impact crypto values.

Konstantin Rabin has been working in the retail FX sector since 2010 and was heading the marketing department of one of the largest European brokerages and a financial data aggregation company. He prefers to trade stocks and holds a Bachelor’s degree in International Business from the University of Groningen, the Netherlands.


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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.

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