eToro USA LLC is a publishing partner of CoinGecko
In our previous review of the eToro platform, we looked at its unique strength of copy and social trading. eToro is, after all, the world’s first social trading platform, and its copy trading functionality is probably the most intuitive and user-friendly out there.
Now, eToro has gone one step further. Not only can you copy the trades of other traders, the platform now gives you the ability to mimic a portfolio selected by a proprietary sentiment analysis algorithm. This portfolio is called TheTIE-LongOnly CopyPortfolio.
In this brief guide, we will dive into the details of this innovative new feature — what it is, how it works, and what you need to know before copying.
What is TheTIE-LongOnly CopyPortfolio and How Does it Work?
TheTIE-LongOnly CopyPortfolio is a portfolio that eToro’s users can elect to copy. Its composition is determined by using advanced machine learning and natural language-processing algorithms to analyse Twitter’s crypto market sentiment. “Long Only” means the strategy is to only buy (i.e. go long on) specific crypto assets — there is no shorting or hedging involved.
Here’s how it works:
The algorithm individually scans every tweet (over 850 million of them daily), extracts the ones related to crypto, and then assigns each tweet a “ sentiment score.” The sentiment score reflects a summation of the tone of all the conversations surrounding each crypto (e.g. how positive or negative they are). Of course, given the nature of the crypto market, the algorithm also takes extensive steps to filter out crypto-related tweets that are gauged to be part of attempts to influence or manipulate prices. This helps separate the signal from the noise.
Once a crypto is determined to have hit certain thresholds based on sentiment score and tweet volume, it may be allocated to a long (buy) position based on quantitative models. Currently, the portfolio will only trade in the following 13 cryptocurrencies:
Out of these 13, a minimum of three will always be held by the portfolio. The portfolio is suggested for rebalanced on a monthly basis — using the above data. The data is sent to the eToro Investment Committee for review and approval, after which a rebalance occurs.
Here’s a visual representation of the four-step sentiment analysis process:
The above is a highly simplified explanation of how the sentiment analysis algorithm works. For more in-depth information, you can check out The TIE’s FAQ post here.
Who is The TIE?
The TIE is a data solutions provider for institutional digital asset traders. Its speciality is building algorithmic trading models for cryptos, with the underlying data often being crowd-sourced. While its primary client base is institutional traders, its partnership with eToro for the CopyPortfolio will, for the first time, give retail traders and individuals access to the same tools used by the big players in the market. Retail traders now get the rare opportunity to benefit from algorithmic trading programs typically only available to institutional traders.
How Can I Invest in TheTIE-LongOnly CopyPortfolio?
Any eToro user can trade in the portfolio. The only requirement is a minimum trade amount currently set at $2,000. There is no lock-in period, and you can withdraw your funds at any time, as per eToro’s usual withdrawal policies.
Simply visit this page and click “Invest”. You can also see the current portfolio composition and all relevant stats.
This will bring up the following pop-up.
You also set a stop loss point to manage your risks.
Does Sentiment Analysis in Crypto Work?
Only time will tell how the portfolio performs over the long term. That said, there is some evidence from the crypto markets of the efficacy of momentum trading strategies—which sentiment analysis could be considered a subset of—in crypto markets.
In July 2018, Yale economic researchers Yukun Liu and Aleh Tsyvinski released a paper that showed a prevailing momentum effect in three of the largest cryptos—Bitcoin, Ethereum, and Ripple. As the paper concluded:
“We show that the cryptocurrency returns can be predicted by factors which are specific to cryptocurrency markets. Specifically, we determine that there is a strong time-series momentum effect and that proxies for traders attention strongly forecast cryptocurrency returns.
All these point to the following conclusion.
Conclusion: TheTIE-LongOnly CopyPortfolio Provides a Unique Way to Invest in Crypto, Using the “Wisdom of the Crowd.”
There’s no right way to trade in crypto, and what The TIE has shown us is that utilizing listening technology can offer interesting and, perhaps, promising results. If you believe in the wisdom of the crowd, this could be your CopyPortfolio.
eToro USA LLC is a publishing partner of CoinGecko.
Ian Lee is a freelance writer specializing in the areas of finance and all things crypto. He also has over five years of experience in investment banking. Follow him at Ian Lee.