What Is an "Algorithm"?

An algorithm, often dubbed an algo, is defined as a set of rules outlined to solve specific problems. Algorithms are typically used in computer programs, and are not specific to crypto. The order of instructions is extremely important in algorithms.

The benefits of algorithms include time savings, more efficiency and clarity and better problem solving, amongst others. Algorithms can help corporations achieve massive cost savings, and are used by a broad range of companies, including those in the financial and technology sector. One common use-case of algorithms is the personalized content we receive on our social media feed.

Another popular use-case is in trading, or so-called ‘algo trading’. This is the process by which a computer program is used to automatically buy or sell publicly-traded assets like securities, commodities and crypto. Algo trading is also used to determine the timing, quantity and execution of trades based on certain pre-coded rules. 

There are several types of trading algorithms. For example, mean revision algorithms examine short-term prices over long-term average prices. If a price exceeds its long-term average, trades will be executed to sell the stock and profit from the situation. 

In crypto, algorithms are particularly useful in setting instructions to automatically buy or sell crypto if certain requirements are met. For example, a trader can set instructions to buy X amount of crypto if the moving average reaches a certain level. A more complicated algorithm will have the ability to hold more data to make buying and selling decisions. In some cases, several algorithms can be used to tackle one single problem.