Crypto Portfolio Based on Twitter – What Could Go Wrong?

A three-year-old crypto portfolio Twitter strategy has been added by the eToro platform for its retail investors and is now available for copy trading. “The TIE – Long Only” strategy measures market sentiment by analyzing Tweets using advanced Natural Language Processing (NLP) tools. What could go wrong?

Twitter

Let’s take an indepth look at the companies behind the product plus the details of the strategy itself. Then, we can determine any possible holes in the program.

What is eToro?

The eToro platform is a social trading and copy trading company that links professional traders (who earn from copy traders) with novice retail traders looking to be immediately involved in trading but who lack the knowledge to trade successfully.

Founded in 2016 in Tel Aviv by Yoni Assia, Ronen Assia, and David Ring, eToro for many years focused on social trading in the Foreign Exchange markets (Forex). Just this year, the platform launched crypto trading on the platform, rolling out initially with 8 established cryptos including bitcoin, Ether, and DASH. However, crypto trading is still not yet available to US investors.

The company employs over 850 people headquartered in London, Limassol, and Tel Aviv-Yafo. At the launch of their crypto trading feature, eToro had 3 million people signed up globally with 200,000 active monthly users.

eToro partnered with TheTIE information services firm to add the new tweet-based portfolio strategy to the platform.

Who is The TIE?

The TIE provides sophisticated data solutions for cryptocurrency assets. It utilizes algorithmic trading models based on the ‘wisdom of the crowd’.

The company is based in New York City and Connecticut, having begun operations in 2017. Founders Joshua Frank, Joseph Gits, Ben Latz and Eric Frank place a high value on the ethics of their data gathering, focusing on transparency and accountability in the products they provide.

The value of digital assets is driven by supply and demand, and movement is determined by the wisdom of the crowd.” eToro

In October 2017, leading up to the massive crypto market price actions of Dec 2017 and January 2018, The TIE first launched the The TIE Long Only strategy. Since that time, the algorithm as brought in a 281% ROI (after fees). When annualized since inception, the strategy has had an average return of 123%.

What’s interesting is that when you compare it to an equally weighted basket of the same crypto assets, which generated 29% ROI, The TIE Long Only outperformed by far.

You can find all the stats and historical performance data on the eToro site. But as you can see from the performance chart below, the heavy gains for 2019 came in a relatively short window of time, when crypto was pumping. The same can be said for 2017 and 2018.

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Why did eToro add this crypto portfolio strategy?

There are several reasons for the addition of this strategy to eToro’s social trading platform:

  1. First, because the crypto market is still in the early stages of maturity, social sentiment is still a significant indicator of cryptocurrency price movements.
  2. Traditionally, the small retail investor has not had the same data and tools for smart investing like the institutional investors and trading firms. This disadvantage is disintegrating in the face of blockchain technology. One of the major tenets of the blockchain industry is to level the playing field for all investors. The TIE Long Only strategy is one way of providing an institutional-grade investment product to the average Joe trader.

How does The TIE Long Only work?

Using a proprietary Natural Language Processing tool, The TIE Long Only scans the Twitter Firehouse, which is a real-time stream of every tweet. They take in approximately 850 million tweets per day. These are then scanned for specific terms related to crypto.

The advanced algorithm scores each word according to predetermined sentiment-related parameters. When the tweet volume for crypto words (such as BTC, Ether, or Binance) reaches a certain threshold of positive sentiment, the coin in question makes The TIE Long Only. Investors copying the strategy are then effectively ‘longing’ the digital asset.

Currently, the five cryptocurrencies with the highest level of market sentiment according to the algorithm will be part of this portfolio. Rebalancing happens every month. To get started, the minimum buy-in is $2,000 and the only fees charged are those associated with the spreads on whatever assets are traded. The cryptocurrencies in The TIE Long Only are not compared against other digital assets. Instead, they are compared to the social sentiment of other assets.

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Possible problems with social media-based strategy

The idea of a sentiment based portfolio seems to make sense in the nascent crypto market. However, there are some issues that could crop up to make the product less viable.

Manipulation

At Rice University, the Chair of Marketing, Utpal Dholokia, spoke about this type of trading strategy to Bloomberg. The gist was that because the crypto market is such a specialized niche, social influence strongly affects buying behavior. It should not be a sole indicator, though, but used more in a wider range of signals. Dholakia’s take is that with this strategy available to retail investors, we could see a lot more traders attempting to manipulate prices using tweeting strategies.

Indeed, anyone that has been active in “Crypto Twitter” understands the power of this sub universe. Crypto projects and their marketing teams can ultimately tweet however much they want using hashtags and positive sentiment-related terminology. In fact, The TIE Long Only is really a measure of Twitter manipulation and not so much a measure of ‘the wisdom of the crowd.”

One of the biggest problems in crypto is when novice traders are influenced by social media into taking risks they are not ready to handle. A tool like this in the hands of everyone could cause a proliferation of tweets by bad actors who are passing off shitcoins as viable investments.

The wisdom of what crowd?

It’s understandable that there aren’t a lot of tools yet to actually measure crypto activity. It’s plausible to turn to tweet sentiment. Especially with Crypto Twitter being the mega platform for crypto-related information. But when we say ‘wisdom of the crowd’, what crowd are we talking about?

Crypto Twitter is awash in new traders seeking information, as well as scam artists trying to hook them in. Meanwhile, you have legimitate projects promoting their offerings and communities dedicated to certain crypto niches, such as the Bitcoin Maximalists and DeFi.

All in all, it’s a very confusing place for any new crypto traders entering. Nefarious characters lay wait, sharpening their knives in the new, unregulated market. Not exactly a hotbed of crypto wisdom, we hate to admit.

Fake Tweets

Another challenge with using Twitter data is the existence of close to 50 million Twitter bots.

These automated tweeting mechanisms often spew out irrelevant or false information regarding cryptocurrencies.

According to a Duo Labs report in 2018, just one scam ICO project had 15,000 bots tweeting about it. Additionally, Crypto Twitter (CT) is full of false bot accounts running everything from referral programs on scan coins to phishing links and automatic engagement, such as with the XRP army.