Automated social trading could be the next big crypto trading strategy

A bit of context

In the previous two blog posts I showed you how to create a Bitcoin trading bot that buys Bitcoin every time Elon Musk tweets about it, and how to improve it by adding sentiment analysis in order to avoid buying when Elon says something along the lines of “I don’t believe in bitcoin anymore, selling the lot”. 

If you’re interested in the set-up and how to build your own have a look at the previous two blog posts here and here, they include a GitHub Repo and a detailed guide on all the materials you need.

Social bots and proof of interest

After sharing this crypto trading bot with the reddit community in /r/CryptoCurrency it became clear that a lot of people are interested in new and creative ways to enhance their cryptocurrency trading strategy. 

You guys asked for it so here it is: I built a bot that buys Bitcoin when Elon Musk Tweets about it and open sourced it from r/CryptoCurrency

In a recent interview with Decrypt I discussed the Musk twitter bot (aka the “Elongator” thanks to the Reddit community), covering the challenges, limitations and opportunities that such a bot can bring if it is properly integrated with major Exchanges such as Binance and Coinbase.

While the idea to buy Bitcoin when Elon Musk tweets about it had originally been created for fun, this level of interest suggests that a more robust version of this bot could have useful real-life applications and move evolve from an “Elongator” to a social media bot that can follow hundreds of big influencers and make decisions on multiple coins.

The social trading opportunity

Exchanges like eToro have already implemented social trading on their platform for a while now, although it works a little differently than the idea that I’ve been exploring. eToro allows you to copy the trading activity of popular eToro traders.

The crypto trading bot that I’m discussing here would allow you to make automated trading decisions whenever a group of influencers are talking favourably about a coin of your choice. From Technokings to popular YouTube vloggers, many express their opinion on their favourite Cryptocurrency and encourage others to adopt it.

There is an invisible indicator that has been used for HFT trading by large investment groups for years! HFT firms scan the net for articles, tweets, videos and more in order to invest into an asset before it blows up. These are giant companies that don’t read the news, they make them. As a crypto trader myself, I felt  the need to upgrade my trading strategy, manually scanning the news and placing my trades off that simply doesn’t cut it anymore.

The great thing about the crypto market is that you have access to more or less the same tools used HFT firms in order to scan the net and make a decision, and this is what the “Elongator” is all about.

Risks and challenges

This strategy is not without risk, and I would like to point out some of the challenges that we are likely to be facing while developing and using a social trading tool. 

Short term

In the short term, there is a lack of data, and therefore lack of confidence in this strategy. We know that high profile Twitter accounts like Elon Musks’ often have an influence over the cryptocurrency price when they talk about it. The challenge is to define exactly how much on an impact different public persons have over any given coin, as there is little to no data available on the market for it. A recent Reddit user I had a conversation with has expressed an interest in creating an API that will analyse the price impact of Tweets from high-profile accounts, and I would love to have a look at the data, and even use the API to drive my decision-making logic.

Long term

Decrypt editor Jeff John asked me a relevant question regarding the regulation and manipulation of the market, one that I did not have a good answer at the time but I do now.

Strategy performance

Once these bots are mainstream, Musk’s Tweets will pump the cryptocurrency market even more because everyone will buy when he mentions Bitcoin. On one side you have a self-fulfilling prophecy that by simply using the bot, the bot works and is more profitable than it would have been before mainstream adoption. But on the other side, this also gives more power to influencers to manipulate the crypto market – in theory. In Practice it’s a little more complicated than that: as the volume and adoption of cryptocurrencies keep increasing, it will eventually become less move-able by public opinion, but we’re a long way away from that – and that’s not a bad thing for the perspective of this trading strategy.

The legal aspect

The government would need to ensure that people are not manipulating the market on purpose, but at the same time maintain free-speech and the freedom to run these algorithms. The law always plays catch-up with tech advancements so we’ll be waiting on the other side of the bridge until the regulations eventually arrive to cross it.

Would use a tool like this?

I am currently planning on creating an application that lets you choose which accounts you would like to follow and make automated trading decisions based on their tweets. Unlike the code that I shared in the previous post, this development would be mostly plug-and-play, follow-and-buy. I am interested to know your take on this and if you would use this tool, so please let me know in the comments below!

 

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