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Will AI Cure The Trading of Speculations and Create The New Financial Crisis

19 September 2018 18:03, UTC
Anna Zhygalina

In the previous article we wrote about the trading algorithms and the way of neural networks are being used. While studying this issue, our experts raised the topic from a new angle and further in the article you will learn their opinion about the future of not only digital, but also the global economy. The main question is how to prevent the 2008 crisis recurrence and what role does the rapidly growing AI technology market play in this process.

Echoes of the 2008 crisis - our lessons for the future

The global economy has not fully recovered from the 2008 global financial crisis yet. Everyone remembers well the night of Monday 15 September, when one of the largest US banks Lehman Brothers announced its bankruptcy. And after that the whole house of cards felt down: Washington Mutual, General Motors, Chrysler LLC also went bankrupt. Some major banks took advantage from this collapse to shift the economy focus: for example, JP Morgan Chase bought the assets of Washington Mutual which costed $136 billion for only $1.9 billion. And Morgan Stanley and Goldman Sachs instantly transformed into bank holding companies.

The world economy burst like a bubble, that had been inflated by the stock exchange. However, the prerequisites were back in 2006 in the USA, when the solvent population became less and the mortgage crisis made itself felt for the first time. Already in 2007, the situation became more global, when for the whole year and half of the next banks in other countries suffered with losses of $390 billion with a large share fell on Europe among them.

One of our experts, Amardeep SINGH,  academic scholar and cofounder of the radical DLT and AI company in an exclusive interview for Bitnewstoday.com suggested that only those countries that “didn’t get involved in any of this nonsense trading” survived. According to Mr. SINGH, the most resistant to the crisis were the countries with the traditional economy: “China concentrated on manufacturing and India concentrated on anti-outsourcing, and they just stuck to that plan. They did not involve too much sort of foreign direct investment, they just continued to power their economies in the traditional way. And Russia did ok as well, I mean there was a good flex”

The 2008 crisis led to a 40% drop in the value of American corporations, and companies in European markets reached 50%. World trade fell by 10%, and world GDP showed a negative value for the first time since the end of the Second World War by 2009.

Experts note significant jumps in the economy due to the huge arrival of neural networks in trading. And this may lead to another crisis.

The neural network will be able to heal the economy

According to experts, machine learning is an effective preventive tool against the scam in various spheres of life. For example, PayPal  analyzes millions of transactions while fighting with the money laundering, so the the fraud volume was reduced to a record low ratio of 0.32%, comparing to the standard level in 1.32% in the financial sector.

The AI has become an ideal indicator of corruption in business applications. Neural networks are now increasingly used in real business applications. And in areas such as fraud detection and risk assessment, they have become the undisputed leaders among the methods implemented. And the effectiveness of their use in forecasting systems and marketing research is constantly growing.

Despite of that Mr. SINGH believes that the market that is regulated by AI, in general, can lead to the collapse of the market system which is based on trader speculation.

The problem is that now everyone is trying to support markets that are based on speculation, and this is an unhealthy trend for the economy: we get the things like the 2008 crisis with it.

“If you program a convoluted neural network or a recurrent neural network, or anytime with AI, if you program and you keep doing the same thing aggressively when it’s winning, if your program ever wants to short the market and then encourage the market to drop-drop-drop, you get exponential effect, that we saw in 2008”, - says the expert.

In other words, what we are now seeing in crypto trading when the bitcoin bubble first inflates and then bursts, and its value, which is rising for many days and then falls, is nothing more than an aggressive strategy game in the market. This is what brings traders the maximum profit. Thus it first gives the opportunity to buy bitcoin at the bottom position, and then start to inflate the bubble again. The main and only goal of any trader is to maximize his profit. And they will use AI only for its scaling or its application to help them analyse markets.

”This is a problem with the traders at the moment - they are all a part of the financial services industry and that industry doesn’t want to die. For them profit is everything, they are motivated entirely by profit, so I don’t see them sharing profit anyway" - the expert says.

But if everyone starts using neural networks, the situation will change: a huge profit will not be concentrated in the hands of certain players and will, accordingly, be distributed among all the trading participants. Thus, this situation will benefit the crypto economy itself, because in the end it will stabilize, but for some traders this way will be absolutely unprofitable. Singh highlights the movement from away from ICOs to proof-of-stake and security tokens.

Another reason why traders will not use AI technologies everywhere, according to Mr. SINGH, is that most of them are “not AI engineers, not computer scientists, they are just guys with financial background who have an understanding of what an algorithm is”.

The expert sees the evolution of trading in the digital world by this way: “Ultimately you’ll reach the point where the machine learning can teach itself, what we call the point of singularity or surpassing artificial general intelligence. What a lot of experts say is we’re 20 years away from this, or we don’t know how far away this point is. Eventually it would be self-sustaining AI which will be able basically transform or generate new markets by itself. I’m hoping the traders will be replaced purely because most are motivated by instant financial gain and not the effects it has on the planet or humanity. I hope they will. Because at the moment the trading in all market is not regulated enough and it is based on too much speculation which is harming everyone and our planet”.