Bitcoin’s megaphone pattern, explained: How to trade it

Key takeaways

• The Bitcoin megaphone pattern features at least two higher highs and two lower lows, forming an expanding structure.

• Connecting these highs and lows with trendlines creates a megaphone-like appearance, reflecting market instability.

• The formation signals heightened volatility, with price swings becoming more pronounced over time.

• Depending on the trend direction, the pattern can indicate potential breakouts either upward (bullish) or downward (bearish).

The megaphone pattern, also known as a broadening formation, is a technical analysis chart pattern that traders observe in various financial markets, including cryptocurrencies like Bitcoin. 

This pattern is characterized by its distinctive shape, resembling a megaphone or an expanding triangle, and signifies increasing volatility and market indecision. Here are its defining characteristics:

• Higher highs and lower lows: The pattern consists of at least two higher highs and two lower lows, forming an expanding structure. Each subsequent peak is higher than the previous one, and each trough is lower, creating diverging trendlines.

• Diverging trendlines: When trendlines are drawn connecting the higher highs and lower lows, they diverge, forming a broadening pattern that visually resembles a megaphone.

• Increased volatility: The formation of this pattern indicates heightened volatility as the price swings become more pronounced over time. This reflects a struggle between buyers and sellers, leading to wider price movements.

Did you know? Bitcoin megaphone trading differs from traditional megaphone trading in that no physical megaphones are involved in the process.

1. Bullish megaphone formation 

This variation of the pattern suggests a potential breakout to the upside.

• Initial uptrend: The price begins in an uptrend, reaching the first peak (point 1).

• First retracement: A pullback occurs, creating a lower low (point 2) that is still above the prior trend’s starting level.

• Higher high formation: The price rallies again, surpassing the previous high and forming a higher high (point 3).

• Lower low expansion: A more pronounced drop follows, leading to a lower low (point 4), extending the range of price fluctuations.

• Breakout and continuation: The price breaks above the resistance line (point 5), confirming a bullish breakout.

2. Bearish megaphone formation 

This version of the pattern signals a potential downside breakout.

• Initial downtrend: The price begins with a downward movement, setting an initial low (point 1).

• First retracement: A minor upward correction follows, forming a lower high (point 2).

• Lower low expansion: A new low forms (point 3), further widening the range.

• Higher high formation : The price spikes again but still struggles to hold above prior highs (point 4).

• Breakout and reversal: The price breaks below the support line (point 5), confirming a bearish breakout.

Did you know? A high-volume breakout from a megaphone pattern signals strong market conviction, confirming a real move. Low volume? It’s likely a fakeout, with the price reversing back. Remember, wait for a volume spike before entering.

Megaphone history in Bitcoin trading

The megaphone pattern, or broadening formation, has appeared at various pivotal moments in Bitcoin’s trading history:

1. The early days: 2013–2014

In Bitcoin’s (BTC) formative years, extreme volatility often produced broadening formations. During this period, traders noted megaphone patterns — often with a bearish tint — reflecting wild price swings as the market struggled to find balance. 

Although less documented then, these early examples have since become reference points for understanding how chaotic market conditions can manifest as megaphone formations.

2. The late 2017–early 2018 bearish formation

As Bitcoin surged toward its then-all-time high near $20,000 in late 2017, a bearish megaphone pattern appeared on daily charts. This formation, marked by diverging trendlines with higher highs and lower lows, signaled increasing indecision and mounting selling pressure. 

Many technical analysts viewed it as a warning sign of an impending reversal — a forecast that materialized with the dramatic correction experienced in early 2018.

3. The early 2021 bullish turn

In early 2021, as Bitcoin approached the $60,000 threshold, traders observed a bullish megaphone pattern forming on multiple timeframes. Characterized by a series of progressively higher highs and higher lows, this pattern indicated a period of heightened volatility combined with cautious optimism. 

The subsequent breakout confirmed a strong bullish momentum, reinforcing the pattern’s validity as a predictive tool in a maturing market.

Trading strategies for the megaphone pattern

In this section, we’ll explore a number of trading strategies compatible with the Megaphone pattern. 

1. Megaphone breakout trading 

Breakout megaphone pattern trading involves entering a trade when the price decisively breaks out of the pattern’s boundaries with strong volume confirmation.

a. Identifying key levels

• Draw upper and lower trendlines: Connect the pattern’s higher highs and lower lows to form the megaphone shape. These trendlines mark the critical resistance and support levels.

• Confirm the breakout zone: In a bullish scenario, the upper resistance line is the key zone to watch for a breakout. In a bearish scenario, focus on the lower support line.

b. Volume confirmation

• Look for a volume surge: As the price breaches resistance (bullish) or support (bearish), a spike in volume indicates strong market participation.

• Reduce false breakouts: If volume remains weak at the breakout, there’s a higher chance of a fake move back into the pattern.

c. Entry points

• Bullish breakout entry: Place your buy order just above the upper resistance line.

• Bearish breakout entry: Enter a short position just below the lower support line.

Did you know? Placing your stop-loss inside the megaphone can help prevent excessive losses if the breakout fails and the price slides back into the pattern, giving you added protection in volatile markets.

d. Profit targets

Measure the pattern’s height by finding the vertical distance between its lowest and highest points, then use a portion of this measurement (commonly around 60%) to determine a balanced take-profit level.

By projecting that percentage from the breakout point, whether above the upper resistance (for a bullish scenario) or below the lower support (for a bearish one), traders can set realistic targets while maintaining a favorable risk-to-reward ratio.

2. Swing trading within the pattern

Swing trading within a megaphone pattern involves capitalizing on the interim price moves between its support and resistance boundaries — without necessarily waiting for a definitive breakout.

a. Identify key lines

• Upper resistance (R1, R2): These lines represent zones where price is likely to encounter selling pressure.

• Pivot line: A midpoint reference that can act as temporary support or resistance, depending on the direction of the price move.

• Lower support (S1, S2): Zones where buying pressure may emerge.

b. Look for buy signals near support

In a bullish megaphone, consider entering long positions near the lower support lines (S1 or S2), especially when you see a bounce or bullish candlestick formation.

Confirm signals with oscillators (e.g., RSI, stochastics) or volume upticks indicating a shift in momentum.

c. Sell signals near resistance

In a bearish megaphone (or even within a bullish one, if you’re comfortable short-selling), traders may look for short entries near upper resistance lines (R1 or R2).

A candlestick reversal pattern or a decline in volume at these resistance levels can reinforce the likelihood of a price reversal.

d. Stop loss and take profit

Place your stop-loss just above the resistance line (e.g., slightly above R2) to minimize losses if the price breaks out higher. 

For take-profit targets, consider exiting near the pivot line or the first support (S1). In cases of strong downward momentum, take partial profits at S1 and aim for S2 with the remaining position.

e. Use the pivot line as a decision zone

The pivot line in the center often serves as a short-term inflection point:

• Above the pivot: The bias may be bullish, favoring long positions.

• Below the pivot: The bias may be bearish, favoring short positions.

If the price consistently hovers around the pivot line with no clear direction, wait for it to test either a support or resistance level to confirm the next swing.

f. Combine volume and indicators

Look for volume spikes at each support or resistance test. An uptick in volume when the price bounces off support or reverses from resistance can signal a stronger move.

Also, tools like the relative strength index (RSI) or moving average convergence/divergence (MACD) can help confirm overbought/oversold conditions, strengthening the case for a reversal trade.

3. False breakout strategy

False breakout megaphone pattern trading involves recognizing when the price briefly breaches the megaphone’s support or resistance, only to quickly return within its boundaries — a scenario often accompanied by low volume.

In such cases, instead of chasing the breakout, traders look for confirmation of the reversal before entering a counter-trend trade. 

This strategy requires identifying key trendlines that define the pattern, monitoring volume for weak breakout signals, and entering a trade once the price re-enters the formation, typically placing stop-loss orders within the pattern to limit losses and setting profit targets based on the measured height of the formation.

Risk management and considerations

Given the inherent volatility of Bitcoin and the wild price swings characteristic of the megaphone pattern, robust risk management is essential to safeguarding your trading capital. Here are several key strategies to incorporate into your trading plan:

1. Volatility awareness

• The expanding range of the megaphone pattern signifies increasing uncertainty. Recognize that rapid swings can lead to both substantial gains and equally significant losses.

• Monitor market sentiment closely and be prepared for sudden reversals, especially during false breakouts where low volume might signal a lack of conviction.

2. Position sizing and leverage

• Position sizing: Determine your position size based on the maximum risk you are willing to take (typically 1%–2% of your trading account).

• Cautious use of leverage: While leverage can amplify profits, it equally increases potential losses. Use leverage sparingly and ensure your risk parameters can accommodate amplified swings.

3. Stop-loss and take-profit levels

• Stop-loss orders: Place stop-loss orders just within the megaphone formation’s boundaries. This positioning helps limit losses if the price reverses unexpectedly.

• Take-profit targets: Calculate your profit targets by measuring the vertical distance of the pattern and projecting a reasonable percentage from the breakout point. This ensures you secure gains while maintaining a favorable risk-to-reward ratio.

4. Adaptive risk controls

Market conditions can shift rapidly. Continuously reassess your trades by:

• Monitoring volume and momentum: Use volume spikes and momentum indicators to adjust your stop-loss or take-profit levels dynamically, ensuring that your exit strategy adapts to the evolving market.

• Using trailing stops: Consider employing trailing stop orders to lock in profits as the price moves in your favor while still allowing room for potential gains.

And that’s it — happy megaphone trading! 

How to buy Bitcoin with a credit card

Key takeaways

• Buying Bitcoin with a credit card offers nearly instant transactions and convenience, but it costs you higher fees and potential blocked transactions from card providers.
• Centralized exchanges like Coinbase and Kraken are the easiest reputable platforms on which to buy Bitcoin with credit cards.
• To protect yourself during transactions, only use trusted exchanges and use security protocols like 2FA.
• Credit card purchases can offer some extra protection against fraud compared to other payment methods, but purchase limits can be more restrictive

Looking for the quickest and easiest way to purchase Bitcoin? Buying Bitcoin with a credit card is almost instant on many platforms. Before you start your digital shopping spree, you should take a few minutes to learn how to buy Bitcoin (BTC) with a credit card in the most efficient way. 

However, if you’re not careful, you could end up damaging your credit score and even getting scammed out of your investments. 

Below, you will find a step-by-step process for purchasing Bitcoin on a reputable exchange, plus learn how to protect yourself from unnecessary financial distress along the way. 

Why use a credit card for Bitcoin purchases?

Buying Bitcoin via a credit card is almost instant on major exchanges. It can be performed easily on a mobile device or web, allowing buyers and traders to quickly take advantage of market moves.

Often, the cryptocurrency exchanges that accept credit cards are regulated and will use high levels of encryption. These exchanges will require Know Your Customer (KYC) and Anti-Money Laundering (AML) checks for security and compliance.  

Purchasing Bitcoin with a credit card is a beginner-friendly option for new cryptocurrency investors already familiar with using their credit cards for online transactions. There may be some protection from the credit card company if something goes awry.

Will buying Bitcoin with a credit card affect my credit score?

Every purchasing decision you make with your credit card will have an effect on your credit score, either positive or negative. Crypto is likely to do more harm than good to a credit score. Here’s why:

• Particularly with large Bitcoin purchases, it will increase your credit utilization ratio. Banks don’t reflect kindly to high credit utilization above 50% of a credit limit.
• Traditional banks and card issuers classify crypto purchases as cash advances and risky transactions. 
• Payment history still remains the key factor in your credit score. Credit issuers may well frown upon regular Bitcoin purchases.

Did you know? Over 85% of retailers across the world accept credit cards, while only 25% of online retailers accept crypto payments. Credit cards are still more widely accepted; however, crypto acceptance is growing quickly. 

Where to buy Bitcoin (BTC) with a credit card

You could buy Bitcoin with credit cards on centralized crypto exchanges (CEXs). Well-known global platforms like Coinbase, Kraken and Binance all enable their users to buy Bitcoin with a credit card. Adding to this, you can use instant buy features to purchase Bitcoin with a credit card without depositing fiat currency into your account first. 

However, the regional availability for CEXs varies from platform to platform. This is usually dependent on local regulations and compliance. So, before picking a platform, you should check if it operates in your location and with your card issuer.

What if a credit card transaction is declined?

Many traditional banks actively block crypto-related transactions, which means you might find your credit card declined when attempting to purchase Bitcoin or other cryptocurrencies. This is often due to the bank’s policy against facilitating cryptocurrency transactions. 

However, there is good news: Modern fintech banking alternatives, such as digital banks and crypto-friendly payment platforms, are increasingly supportive of cryptocurrency purchases, offering a smoother transaction experience.

Aside from bank restrictions, other reasons for declined crypto transactions can include fraud prevention measures, where the transaction is flagged as suspicious. Additionally, exceeding your credit card’s spending limit or encountering issues with your card’s authorization settings can also lead to a declined transaction.

Is there a limit to how much Bitcoin can be bought with a credit card?

The purchase limit for Bitcoin varies for each individual and is influenced by two main factors. First, the spending limit on your credit card, which is determined by your bank or card issuer. Second, the crypto exchange you’re using will impose its own purchase limits. 

For first-time buyers, these limits can be relatively low — often just a few hundred dollars. However, depending on the exchange and your account history, these limits can typically be increased to $5,000 or more per week if needed.

You should also be aware of the credit card Bitcoin purchase fees that can include: 

• Exchange fees: Typically 3%–5% for credit card purchases (this is higher than other methods, which can be as low as 0.1%).
• Card issuer fees: Some treat crypto purchases as cash advances.
• Foreign transaction fees: It may apply to fiat foreign currency transactions. 

Did you know? 8%–10% of the adult global population is thought to own cryptocurrency of some form in 2025. A huge jump from 1%–2% in 2018, highlighting the increasing adoption rate.

How to buy Bitcoin on CEXs with a credit card

Buying Bitcoin with a credit card is one of the quickest and easiest ways to make a purchase. Once you have a verified exchange account, you can make the transaction almost instantly. 

Below is a step-by-step guide on how to buy Bitcoin with a Visa or Mastercard on Coinbase. Steps on other exchanges may vary, but the process is generally very similar. 

Step 1: Create a verified account

Follow the user-friendly sign-up process. Ensure to activate 2-factor authentication (2FA) to double-lock your account.  

During the sign-up process, you’ll need to verify your identity. Crypto regulations in many countries require exchanges to comply with KYC and AML regulations. To pass these checks, you must upload a valid government ID (passport, driving license or any other acceptable ID card).

Step 2: Link your credit card

Once your account is accessible, use the right-hand side panel to add your payment method. This will give you the option to link a credit card. Add your card details and click  “Add Card.”  

Step 3: Buy Bitcoin

Using the right-hand side panel instant buy feature, select Bitcoin and the amount you’d like to purchase. The exchange buy limit will also be shown next to your credit card payment method. This is usually limited to 10,000 British pounds daily on Coinbase. When ready, click “Buy Now.” Confirm the purchase on your banking app. Once approved, the Bitcoin will be added to your exchange account and fiat debited from your credit card. 

How to protect yourself from fraud when buying Bitcoin with a credit card

The irreversible nature of Bitcoin means security and fraud prevention should be at the top of your list. It is your responsibility to protect your financial information and crypto from being compromised. To stay safe when buying Bitcoin, you should:

• Only use a reputable and regulated exchange with a strong security record.
• Use core security features, including unique passwords and 2FA.
• Watch out for phishing attempts. Double-check URLs, and don’t click email links or unsolicited messages.
• Consider moving Bitcoin into a self-custody hardware wallet to protect against exchange hacks and fraud. 

Is it safe to buy BTC with a credit card?

It is generally considered that buying Bitcoin with a credit card is one of the safest methods. This is because it helps to protect your wider financial information, such as direct access to bank accounts.  

You can also benefit from fraud prevention and spending limits that credit card companies offer. So, if your card details or accounts fall into the wrong hands, you will have higher levels of protection. Plus, there is even some recourse to reverse payments and have fraudulent payments struck off. 

While it does offer added protection and convenience, purchases will come at a higher cost. Credit card companies typically charge higher fees for crypto transactions, and you may face restrictions on the size of Bitcoin purchases. 

Many exchanges impose lower purchase limits for credit card transactions, especially for first-time buyers, which could make it less appealing for larger investments. Despite these drawbacks, the extra protection and ease of use make it a convenient option for those new to the crypto space.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

IPMB report: The first vertically integrated gold tokenization project

As the global demand for gold remains strong and the asset’s price has reached all-time highs, investors face a difficult choice between various gold investment vehicles. Traditional methods for investing in gold come with a number of drawbacks. Physical gold incurs substantial buy and sell fees, gold futures require advanced financial literacy, while gold-backed cryptocurrencies often lack reliable reserve audits, or their sources of gold are opaque.

IPMB: bringing together gold and cryptocurrency

The International Precious Metals Bullion Group (IPMB) combines vast experience in the gold industry with opportunities provided by blockchain technology to offer a novel approach to gold investing that is reliable and cost-efficient. By controlling the crucial steps of the supply chain, IPMB offers favorable pricing and transparency for investors in its gold-backed GoldPro Token (GPRO) and GEM NFTs. 

A recent report published by Cointelegraph provides insight into this precious metals project. It gives an overview of the challenges gold tokenization solutions face, from physical gold issues to providing liquidity and backup guarantees for digital tokens. The report discusses an in-house solution developed by IPMB to track the gold supply chain, its GPRO token fully collateralized by gold, and the gold-backed GEM NFTs. The report concludes with an overview of the IPMB ecosystem and its future development plans.                       

Inefficiencies in the gold market

The supply chain for physical gold relies on multiple intermediaries, which results in price premiums that are ultimately borne by investors. Furthermore, physical gold investments incur premiums at purchase and come with substantial buy/sell spreads, as well as custody fees of up to 1% per year.

In addition to increased costs, complex gold supply chains make it easier to disguise the origin of gold ore and hide unethical mining. For instance, Ghana, a leading gold producer, has faced criticism for unregulated artisanal mining, which harms the environment and often infringes on human rights.

Streamlining the gold supply chain

In contrast to most existing gold tokenization solutions that rely on third-party supplies, IPMB co-owns gold mining facilities in Ghana and controls the entire gold ore delivery process. As a result, IPMB eliminates unnecessary intermediaries and achieves transparency and sustainability for the whole supply chain.  

The forthcoming launch of the Goldtrace360, an in-house tracking solution designed by IPMB, will automate the tracking process and significantly reduce latency. Goldtrace360 will utilize IoT technologies to record every step in the gold production process on the blockchain.

Introducing gold-backed GEM NFTs

GEM NFTs are digital promissory notes IPMB offers for investment grade 24-karat gold. GEM NFTs are ownership titles for gold bars on the Polygon blockchain. They range from 1 gram to 12,500 grams to cater to a wide range of potential investors.

GEM NFTs can be obtained by staking GPRO, the native token of the IPMB ecosystem on the Polygon blockchain. While GPRO tokens are 1:1 backed with gold, their price remains free-floating.

To obtain an NFT of a specific denomination with a discount, the user must stake a corresponding number of GPRO tokens for a period of between three and 12 months. Longer staking is rewarded with a higher discount. If 100 GPRO tokens are staked for 12 months, 89 GPRO will be converted into a GEM NFT and 11 GPRO will be returned to the user. A limited number of NFTs are allocated to staking each month.

If the user triggers GPRO to GEM NFT conversion at the end of the staking period, GPROs get burned. At the same time, the GEM NFT gets assigned a unique 24-karat gold coin or bar and a London Bullion Market Association (LBMA) serial number, which is also reflected in the NFT metadata.

GEM NFTs that are at least one year old can be redeemed for physical gold, and the redemption is free of charge for NFTs of over 100 grams of gold in denomination. If not redeemed, NFTs stay free of insurance, custody or management fees for the first five years following the mint date.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Cointelegraph does not endorse the content of this article nor any product mentioned herein. Readers should do their own research before taking any action related to any product or company mentioned and carry full responsibility for their decisions.

How to utilize AI agents in decentralized finance (DeFi) platforms

Key takeaways

• AI agents in DeFi are self-operating apps that can help navigate by optimizing trading, adding risk management and market analysis without human intervention.
• These agents integrate with DeFi platforms through smart contracts, offering automation for tasks like portfolio rebalancing, yield farming and enhanced security.
• AI trading agents adapt to real-time market conditions, identifying trends and executing trades 24/7 across multiple platforms.
• Despite their potential, AI agents face challenges such as reliance on high-quality data, regulatory uncertainties and vulnerability to security risks.

Imagine a world where trading is no longer limited to human financial knowledge and capacities. In this world, machines don’t just execute trades but also adapt and continuously optimize strategies on their own. This isn’t the distant future; it’s the reality emerging in decentralized finance (DeFi) today, thanks to AI agents.

AI agents are self-operating software programs that can make decisions independently, without human interaction. They use machine learning algorithms to refine their processes and adapt continuously. 

In traditional finance, AI has already transformed trading, risk management and customer service. In DeFi, where trust is built on code, not intermediaries, AI has opened new avenues for autonomy, transparency and effectiveness.

This article will explore what AI agents are and how to utilize AI in DeFi platforms.  

How AI agents power DeFi

AI agents are like helpful robots that live inside DeFi platforms and manage finances. They’re integrated with smart contracts and decentralized applications (DApps), which function like regular apps but instead are run on a blockchain.

Some DeFi platforms have AI agents integrated into them. These agents can work with decentralized exchanges (DEXs) and lending platforms to make trading easier, smarter and safer for users. However, some apps or bots must be downloaded to start interacting with an AI agent. 

For instance, an AI agent could monitor interest rate trends in Aave, optimizing lending strategies. If the interest rates for borrowing assets on Aave drop below a threshold, the AI could automatically rebalance your portfolio, shifting your assets to a more profitable lending market.

In contrast, some platforms offer AI services through subscriptions. You pay a small fee, and the AI takes care of tasks like automatic trading or rebalancing your portfolio without needing you to do anything.

AI agents often work through smart contracts, which are like self-executing agreements that run automatically when conditions are met. There is no need to trust an intermediary; everything is handled by code, making transactions safe and automatic. Here’s how it works:

• Predefined rules: The AI agent interacts with a smart contract containing predefined conditions (e.g., “buy Bitcoin if the price drops to $40,000”).
• Real-time data analysis: The AI continuously monitors market conditions, user preferences or risk factors and feeds this data into the smart contract.
• Automatic execution: When the conditions are met, the smart contract executes the transaction instantly, whether it’s a trade, loan adjustment, or portfolio rebalancing.

Did you know? According to CoinGecko, interest in AI agents has surged, with the market cap of this niche growing by 222% to over $15 billion by the end of 2024. 

Different ways to use AI in DeFi

AI agents in decentralized finance are transforming how users manage their assets, from trading and market analysis to risk management and security. These AI-powered tools enhance DeFi platforms and help users save costs by reducing the need for professional financial firms.

AI agents for crypto trading

AI agents are taking the role of traders by automating their daily routines. While traditional bots follow pre-set rules, AI trading agents learn from market patterns and adapt their strategies in real time.

They monitor price fluctuations of cryptocurrencies, identify trends and execute trades 24/7, ensuring that your portfolio is always managed with up-to-date information. They can spot arbitrage opportunities and optimize buying/selling decisions across multiple platforms.

For example, an AI-powered trading agent might execute complex multi-step trades, taking advantage of price differences between various DEXs and ensuring that opportunities are not missed.

AI agents for risk management

Risk management in the risky DeFi world can be daunting, but AI agents can help manage it. With the ability to continuously monitor market volatility, liquidity, and borrower credit risk, AI agents provide a more accurate and real-time risk assessment than traditional systems. 

In DeFi lending, for example, AI agents examine a borrower’s history on various platforms and offer customized collateral and loan terms based on real-time inputs.

AI agents for crypto market analysis 

AI agents can process vast amounts of data. By scanning the price history of cryptocurrencies, social media sentiment and economic indicators, these agents are constantly learning and adapting to predict market trends. As a result, they can spot emerging trends, forecast price movements and even identify the next big DeFi project.

With this information, traders and investors can stay ahead of the curve, making more informed decisions and avoiding risky markets.

AI agents for enhanced security

Security is one of the significant topics in DeFi, and AI agents can become crucial in helping detect fraudulent activities. They can analyze patterns to identify unusual behaviors, such as rapid, large withdrawals or trades that could signal a breach. 

Furthermore, AI agents can monitor smart contracts to detect vulnerabilities before they are exploitedexploiting them, ensuring the platform’s security.

AI agents for yield farming and staking

As yield farming and staking pools can be highly lucrative, constant monitoring of gas fees, rewards, and interest rates for optimization is required. AI agents are adept at determining the most profitable pools to stake or farm tokens, switching strategies on the fly to compound returns. They can ensure that your assets always work for you, even when you are not actively controlling them.

AI agents as personalized financial assistants

By acting as personalized financial assistants, AI agents can help users navigate the complexities of DeFi. They can suggest the best investment opportunities, provide portfolio advice and help users optimize their assets while saving costs — without requiring in-depth crypto knowledge.

Additionally, some agents can assist with taxes and financial research, making it easier to navigate the accounting field. This creates a more inclusive DeFi ecosystem where newcomers can participate and make informed decisions.

Let’s focus on creating an AI agent for portfolio management in DeFi. This AI agent will help manage and optimize your cryptocurrency holdings in a decentralized way.

Did you know? In decentralized autonomous organizations (DAOs), AI agents can be leveraged to provide data-driven feedback and recommendations on governance proposals. From processing onchain information, sentiment within the community, and economic statistics, such agents help DAO participants make more informed decisions.

AI agent for portfolio management in DeFi: Step-by-step guide

This section explains how to create an AI agent for DeFi portfolio management that autonomously optimizes asset allocation, rebalances holdings and leverages yield farming opportunities through smart contracts.

Step 1: Define portfolio management goals

Start by defining what you want your AI agent to achieve with your crypto wallet. Common portfolio management goals include:

• Rebalancing: Ensuring the portfolio stays aligned with the desired allocation (e.g., 50% Bitcoin (BTC), 30% Ether (ETH) and 20% stablecoins).
• Risk management: Adjusting allocations based on market conditions or volatility.
• Diversification: Ensuring the portfolio is spread across a variety of assets to minimize risk.
• Yield optimization: Allocating assets to maximize returns through yield farming or staking opportunities.

Your AI agent will analyze your portfolio and automatically rebalance it on a regular basis every month to keep your crypto allocation within the desired percentages, adding stablecoins when volatility is high or increasing exposure to promising altcoins during a bull market.

Step 2: Choose the data

Your AI agent will need market data to make informed decisions. For portfolio management, the data includes:

• Price: Real-time and historical data of various cryptocurrencies.
• Market conditions: Volatility, liquidity, market trends, etc.
• DeFi opportunities: Information about yield farming, staking and lending rates.
• Risk metrics: Data on market risk and volatility levels.

Use APIs like CoinGecko or CoinMarketCapto to fetch real-time price and market data. Get information on available yield opportunities from Yearn.finance or Aave.

Step 3: Build or choose an AI model

For portfolio management, a reinforcement learning model might be most appropriate. The AI will learn and adapt its actions based on rewards or penalties. This allows the agent to optimize the portfolio over time by evaluating the performance of different assets and adjusting allocations accordingly.

• What the model does: The AI learns from past portfolio performance and current market conditions to suggest the optimal mix of assets.

The AI will monitor market fluctuations, adjusting asset allocation by moving funds into stablecoins during high volatility or switching into high-yield opportunities when market conditions are favorable.

Step 4: Develop smart contracts for automation

To implement portfolio rebalancing and other tasks autonomously, write smart contracts to handle actions like swapping assets, staking or yield farming based on the AI’s recommendations.

• What the smart contract does: The smart contract will handle transactions like moving assets between wallets, rebalancing portfolios, staking tokens or withdrawing funds from yield farming pools.

So, write a Solidity smart contract that automatically moves your holdings based on the AI’s instructions. For example, if the AI detects that your portfolio has too much ETH and insufficient BTC, the smart contract will automatically swap some Ether for Bitcoin.

Step 5: Integrate AI with the DeFi platform

Use a blockchain interaction library like web3.js or ethers.js to connect your AI with the DeFi protocols. This allows the AI to send transactions to DeFi platforms like Uniswap or SushiSwap to swap tokens, Aave for lending/borrowing or Compound for yield farming.

The AI could determine that a particular stablecoin pool offers the best yield and instructs the smart contract to swap a portion of your crypto holdings for the stablecoin and stake it in the pool.

Step 6: Backtest and optimize the strategy

Before deploying the AI agent, backtest it using historical data to simulate how it would have performed under various market conditions.

• Backtesting: Run the AI model using past market data to see how it would have adjusted the portfolio.
• Optimization: Adjust the model based on backtesting results to ensure it meets your portfolio goals and risk tolerance.

You could run the AI agent with historical data from the past two years, simulating market crashes and rallies, to see how well it rebalances the portfolio and minimizes losses or maximizes gains.

Step 7: Launch and monitor the AI agent

Once the AI is trained and the smart contracts are deployed, you can launch your AI-powered portfolio manager.

Regularly check that the AI performs as expected and that the smart contracts execute correctly. You can set up alerts for significant changes or portfolio adjustments.

For instance, you might want to monitor how often the portfolio rebalances, ensuring the AI isn’t making unnecessary changes or accumulating high gas fees due to frequent swaps. You can also track the performance of your yield farming and staking efforts.

Drawbacks of AI agents 

While AI agents in the crypto space are gaining traction, much of the current excitement remains speculative. Researchers caution that many AI agent projects have yet to prove their utility beyond hype.

One of the biggest concerns is their reliance on real-time, high-fidelity data. Errors or data manipulation can lead to unintended decisions with serious financial consequences. 

Mike Cahill from the Pyth Network highlights that AI agents require ultra-low-latency price updates, ideally sourced directly from first-party providers like exchanges, to reduce risks from outdated or manipulated data.

While interest in AI-related crypto projects has surged, much of the AI agent niche remains speculative. Although some projects address practical challenges, the rapid development of Chinese AI models also adds competitive pressure that may lead to a sell-off among crypto AI projects, according to Sygnum Bank.

Additionally, while AI enhances security, it also introduces new risks. If not properly secured, AI systems can become targets for malicious actors. Moreover, flaws in algorithms could be exploited, making security a top priority for any AI-powered DeFi platform.

The regulatory environment of AI in DeFi is still nascent. Regulators and governments are concerned about algorithmic bias, data privacy and accountability. Resolving these concerns is crucial for AI to be implemented in DeFi on a large scale.