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A new portfolio fund launched by trading platform eToro in partnership with The TIE, a crypto data analytics platform, intends to use Twitter’s hive mind to guide its clients’ investments.
TheTIE-LongOnly CopyPortfolio is a basket of cryptoassets that rebalances each month based on social media sentiment. This is a markedly different approach from portfolios that change their holdings based on price movement or internal valuation metrics.
In a twist of sorts, Josh Frank, CEO of The TIE, says their approach to cryptoassets grew out of the absence of globally accepted valuation metrics in crypto.
“Crypto doesn’t have earnings. It doesn’t have dividends. There are no fundamental drivers of asset valuations,” he told Decrypt, referring to the metrics that are generally used to determine valuation of traditional assets.
He may have a point.
While books have been written about it and analysis, both facile and rigorous, is employed in its cause, a proper method to evaluate cryptoassets still does not exist. Each volatile jerk in crypto markets generates a smorgasbord of explanations, from hash rates to news developments to technical analysis. Even Google search mentions have been cited as a possible explanation for price movement.
“The only, only thing that’s really driving crypto is the wisdom of crowds and the way people view particular assets,” claimed Frank. Those crowds are present online in various forums, including Twitter.
Quantifying social media
The TIE quantifies social media sentiment by monitoring Twitter conversations. A partnership with Social Market Analytics, which provides sentiment analytics and data feeds for traditional asset classes to the world’s largest trading firms and companies, has ensured access to 850 million daily tweets. The firm mines these tweets to generate algorithmic scores.
And what of the spam that Twitter generates through bots, meaningless retweets, and online fights?
The TIE separates signals from the noise through the use of Natural Language Processing (NLP) and Artificial Intelligence (AI), says Frank. Their system scores each word in a tweet and comes up with an individualized aggregate score, known as Raw Sentiment Score, for the tweet using proprietary algorithms for data related to 30 different internal metrics, including the number of people posting about that cryptoasset. Allocations to the 13 cryptoassets currently available within the portfolio are made based on the Raw Sentiment Score.
The TIE already provides this data to institutional investors, mainly consisting of hedge funds. Putting it into the hands of retail investors is part of an effort by eToro to ease the process of investing in cryptoassets.
“We can tell them [retail investors]: Ok, here’s a professional grade tool that allows you to invest as if you were a High Net Worth Individual (HNWI),” explained Guy Hirsch, managing director of U.S. operations at the platform. It also relieves some of the fear and resistance for retail investors to get into this asset class, said Hirsch.
While democratizing access to retail investors is an admirable effort, it may be a move against the oncoming wave of institutional investors expected to flood cryptoasset markets in the coming years. Most such investors are multinational banks and pension funds. They are not on Twitter or interact sparingly with it, at least as far as venting about their portfolios is concerned. Their positions are also considerably larger as compared to the liquidity provided by retail investors.
Frank from The TIE makes the case that crypto has changed that equation. “Institutional investors are also interacting with cryptocurrencies on Twitter,” he said, providing examples of Chris Burniske of Placeholder.vc. But his is a lone name and hardly representative of the institutional investor community.
Until the time that crypto is retail-driven, Twitter mentions may be important in determining its prices. Crypto institutionalization, however, may bring its own set of changes to valuations that use social-media sentiment to derive prices.