Traditional financial institutions are investing heavily in analyzing market sentiment.

With the strong performance of the cryptocurrency market this year and Facebook's upcoming cryptocurrency project Libra, traditional financial institutions and large hedge funds are once again paying attention to this "untapped market" and are seeking algorithm development that can interpret market sentiment.

For hedge funds and asset management companies seeking an edge in the largely unregulated cryptocurrency markets, price volatility may stem from retail investor sentiment. As a result, they are focusing on developing analytical software and hoping to extract price "signals" from the volume of discussions across major social media platforms.

Elwood Asset Management CEO Bin Ren stated:

Developing algorithms that can identify price clues from turbulent social media platforms has evolved into an arms race akin to that of large financial institutions. While only a few can afford it, I believe it is very profitable.

New York-based quantitative investment firm Bluesky Capital President Andrea Leccese added:

Just developing Twitter bots that can analyze English tweets could cost as much as $500,000 to $1 million initially.

A report highlighted that while sentiment analysis using artificial intelligence and other software has long been an accepted analytical tool in traditional markets, cryptocurrencies, unlike stocks and other traditional assets, do not provide investors with economic indicators and financial statements. Therefore, interpreting market sentiment becomes an ideal choice for financial institutions.

With the growth of social media platforms from Twitter to Reddit, Telegram developed in Russia, Line in Japan, Kakao in Korea, and WeChat in China, the complexity and difficulty of sentiment analysis have significantly increased.

According to data from BitInfoCharts Bitcoin-related tweets reach 22,784 per day, with nearly 1.1 million subscribers on the Bitcoin subreddit on Reddit.

Bin Ren noted that this type of information is not randomly disseminated but spreads through a very clear structure, much like the spread of a virus. He stated:

It's very similar to simulating the spread of a virus.

Furthermore, a survey by the Big Four auditing firm PwC in the first quarter of 2019 found that quantitative funds are leveraging sentiment analysis and other tools to try to achieve higher total returns than their competitors.

In June of this year, crypto analytics firm Coin Metrics, backed by Fidelity, also collaborated with a social market analysis company to develop real-time sentiment analysis for Twitter.

Further Reading

• France to Introduce Cryptocurrency Regulations by End of July
• Global Crypto War Heats Up as Iran Plans to Launch Cryptocurrency Linked to Gold

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