The “Holy Grail” of trading is knowing something is going to happen before it happens – so Gordon Gecko’s listen up. The world over, analysts investors and traders are always looking to find the best way to be more sure of what tomorrow brings, with black boxes churning through petabytes of data to find the thinnest thread of a chance of doing so. But whether its fundamental trading, technical analysis or a combination of both – they are missing out on one key metric – “Social Data” – having their fingers on the pulse of the crowd behind the markets.
Bitcoin and Crypto’s are like no other currency or asset out there – they are the penny stocks of today and instead of moving on the machinations of a Wolf of Wall Street boiler room, they move on the whims of everyone and anyone as well as the charts of the technical analysts and the press.
Technical Analysts pour over charts attempting to uncover the hidden meaning in Pythagorean riddles of golden ratios, Fibonacci fans and Elliott Waves in the hope of finding a pattern. In this way Technical Analysis often becomes a self fulfilling prophecy with the markets being led blindly by their own predictions until they are snapped out by external shocks. There are truths in an EMA 7 crossing an EMA 15 indicating a trend reversal – or a RSI (Relative Strength Index) showing an item to be oversold – but only some of the time.
Fundamental data has its meaning to when you look at a stock. Comparing apples to apples, the stock trading on a lower P/E should be bought and the overpriced one sold. This doesn’t work well with Bitcoin, Ethereum or Dash as how do you value it. You can say it’s the lower bound of the marginal cost of making it – or a percentage of the remittance market as Morgan Stanley has, but the truth is that nobody knows how to value Bitcoin.
One thing we do know is that the Bitcoin price is heavily influenced by news – as there’s one thing that’s worse than being talked about, and that’s not being talked about – and for a young industry such as Crypto Currencies this is especially true.
For example with consensus on segregated witness, or a hard fork to an 8 MB blocksize, sending the price sky high or tumbling down. The number of news articles increases when an event occurs in the Bitcoin ecosystem – such as the Mt Gox collapse or another unveiling of a Satoshi Nakamoto – but this is a lagging indicator that occurs after the event.
The same is true of internal market mechanisms for example triggering a large stop loss and the resultant panic. However this is again a lagging indicator that is unmeasurable without access to internal market data held by exchanges. When an event like this occurs the markets are sent into a blind panic as the wild swings send traders scrambling for exits or opportunities. There is no forewarning. This will appear to make social data a lagging indicator.
But Social Data is a forward warning signal too when the price move starts from the right place. Here are three examples below with charts courtesy of CryptoCompare.com.
Example 1: Bitcoin Reddit Posts Per Hour
Although the Chart does show two periods of above average reddit post activity the second spike clearly indicates a pre-indication of a more heightened and frenetic reddit conversation than usual.
Example 2: Ethereum Reddit Posts Per Hour Reddit Subscribers Momentum
The Ethereum Reddit posts per hour saw a dramatic increase in sync with increasing volume. The price subsequently put on 15%.
The Ethereum Subscribers saw a decline to flat period before an uptrend.
Example 3: Dogecoin Reddit Posts Per Hour
The Dogecoin price jump was preceded by an increase in subreddit activity too. The Relative Strength index was also pointing to oversold.
Charts courtesy of CryptoCompare.com