Crypto Twitter Is Irrational, Toxic, Vicious… And When It Comes To Price, Often Right
Traders make decisions based on the sentiment of online conversations.
More than 11m crypto traders are now able to make decisions based on sentiment, one of the key drivers of crypto prices. Social trading platform eToro and sentiment analytics provider TheTIE have partnered to provide actionable information on what the crowd thinks about digital assets.
As of today, eToro users will be able to use TheTIE-LongOnly CopyPortfolio, a strategy that uses algorithms to allocate value into a subset of thirteen cryptocurrencies on a long position.
Calling the partnership a “perfect match”, Joshua Frank CEO and co-founder of TheTIE said sentiment gave traders a much better picture of the asset-class. “The one thing about crypto is the markets are irrational,” he said, with the majority of traders basing their decisions on the industry’s overall attitude at any one time.
“The general premise here is that crypto is an asset-class that lacks fundamentals,” Frank explained. Short-term traders generally don’t make decisions based on the technical differences between the protocols, but instead on sentiment gleaned across multiple social platforms – with Twitter at its epicenter.
Twitter Is Not A Financial Advisor: But You’d Better Listen Anyway
Although Twitter has often proven to be a toxic shitpot of scams, misinformation, leaks, and Mike Dudas’ sincere apologies, the data doesn’t lie:
“If people get super excited about something on Twitter, even if there’s nothing behind it, the asset tends to move in a direction,” said Frank.
The proof is in the pudding. By backtesting, Frank explained that he’s “seen significant outperformance of sentiment-based strategies” versus simple holding tactics.
[su_quote]If a trader had used TheTIE-LongOnly CopyPortfolio, since October 2017, their portfolios would have appreciated by 213%.[/su_quote]
That’s against just holding Bitcoin (BTC), where returns would have barely hit 30% over the same time period.
While sentiment is certainly present in other asset classes – it played a pivotal role in a string of WeWork IPO devaluations as well as its subsequent cancellation – it has more sway in crypto as a primarily retail-driven and immature market.
And although there are plenty of other fundamentals for traders to formulate long-term holding strategies – such as the underlying technology, the tokenomic design, the caliber of the team and so on (as highlighted by the SIMETRI Research team at Crypto Briefing) short-term gains are more often driven by the rumor mill, partnership announcements, mainnet dates, and other catalysts.
Last month TheTIE unveiled a suite of data APIs that allow institutional and professional traders to trade on sentiment. Although the client list isn’t public, it includes several quantitative hedge funds.
As the market matures and institutions increase their exposure to digital assets, other data-sets may begin to surface that illuminate some of crypto’s other fundamentals.
But Frank thinks sentiment analysis will have a “leading role in trading strategies for the foreseeable future”. TheTIE plans to continue expanding their offering, providing traders with the means to take positions based on conversations taking place across the industry.
They plan to introduce a short and market-neutral strategy by the end of the year.