Making sense of chaos? ‘Algos’ scour social media for clues to crypto moves

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Algorithms use so-called natural language processing — identifying key words and emotions that indicate changes in how social media users view certain digital currencies. (Reuters)
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Bin Ren, CEO of Elwood Asset Management
Updated 17 July 2019

Making sense of chaos? ‘Algos’ scour social media for clues to crypto moves

  • Hedge funds and asset managers develop code to scrape social media sites for market-changing news

LONDON: After months of relative calm in cryptocurrency markets, bitcoin exploded back into life in April with its sharpest price jump in over a year — but few people could convincingly explain why.

The 20 percent leap focused investors’ attention on one of the enduring mysteries of cryptocurrencies: What moves the price of an emerging asset in an opaque, largely unregulated market?

For some, the answer lies on social media. Hedge funds and asset managers seeking an edge are training computers to scrape social media sites for triggers that could move the price of digital currencies.

Their goal: Crafting algorithms capable of picking out price “signals” from the background noise of sites ranging from Reddit and WeChat to Twitter and Telegram.

Many investors already use computer models to identify, and trade, price differences across hundreds of cryptocurrency trading exchanges.

But with opportunities for arbitrage narrowing as the nascent sector develops, big players are increasingly looking to build or buy more sophisticated robots to find market-moving signals online, according to interviews with six hedge funds and asset managers and three software developers.

Yet while the use of algorithms, or algos, for parsing social media may be growing, some of those interviewed said major challenges and risks remain to their wider deployment, from cost to complexity.

“It’s an arms race for money managers,” said Bin Ren, CEO of Elwood Asset Management, which specialises in digital assets and is owned by Brevan Howard founder Alan Howard.

“Very few players are able to implement and deliver it, but I believe it is highly profitable.”

Such “sentiment analysis,” as computer-driven reading of the social media mood is known, is used as a tool in traditional markets such as equities and foreign exchange to trade on consumer feelings towards a company or asset.

But it could be of greater significance in cryptocurrency markets, where there are few authoritative sources of information, such as central banks, scarcely any reliable data to gauge asset value such as economic indicators and financial statements, and a high proportion of individual investors.

It is also early days for the technique in the crypto sector, with scant industry-wide data on performance and many questions over its effectiveness. None of the institutions Reuters spoke to would give details of the performance of their algorithms, citing commercial confidentiality.

To be sure, digital currencies do share some drivers with traditional markets such as comments by policymakers. Bitcoin can be sensitive to remarks by regulators in particular: It fell sharply last week after the US Federal Reserve chief called for a halt to Facebook’s planned Libra cryptocurrency project.

But given cryptocurrencies have been entwined with the Internet from their dawn a decade ago, when the word was spread in forums and chatrooms, it would seem to make sense to search for price triggers online.

Still, it is far from cheap or simple to design an algorithm that can find market-moving signals in the cacophonous world of social media, analysing huge numbers of posts in dozens of languages while sifting out unreliable information.

Andrea Leccese, president of Bluesky Capital, an investment firm in New York, said upfront costs for a robot capable of only reading Twitter in English were between $500,000 to $1 million, with most of the money spent on skilled developers. That has deterred Bluesky from using the technique, he said.

One daunting challenge is the sheer number of social media channels. Beyond Twitter, sites often used by cryptocurrency aficionados include Telegram, a messaging app with public channels and Reddit, a messaging board.

In Asia, home to many retail traders, apps such as Line in Japan and Kakao in South Korea are popular.

Tens of thousands of comments on cryptocurrencies are pumped out around the clock across both national and international channels.

Reddit’s main forum, or subreddit, for bitcoin alone has 1.1 million members. Twitter also sees tens of thousands of posts mentioning bitcoin every day, with between 14,000 and 32,000 daily for the last three months, according to the BitInfoCharts website.

In an attempt to extract meaning from this mayhem, algorithms use so-called natural language processing — identifying key words and emotions that indicate changes in how social media users view certain digital currencies.

Investors using algorithms say that they can also identify patterns for information that gains traction online. “The information propagates not randomly, but through a very well-defined structure — it’s like a tree,” said Elwood’s Ren, which has used sentiment analysis for nearly two years after developing its own software.

“It’s very similar to modelling the spreading of a virus.”

Other investors emphasised the challenges in teaching machines to spot biased or inaccurate information.

A Reuters report last November found that many social media users take money for positive reviews of digital coins.

BitSpread, a cryptocurrency asset manager based in London and Singapore, uses its own capital to trade using an algorithm it started developing about a year ago, its CEO Cedric Jeanson told Reuters.

It is a relatively narrowly targeted software. Aggregating Twitter feeds, it looks out for posts on the liquidation, or closing, of positions at exchanges.

“It’s a matter of gathering all the info, trying to understand who is trading where, what kind of liquidation can appear,” he said. “It’s a strategy that makes sense.”

However, he acknowledged the drawbacks.

“The sentiment itself, what we see on Twitter, can be really geared towards fake news. We are always very cautious about what we’re reading in the news because, most of the time, we’ve seen that there’s a bias.”

Many algorithms use machine learning, where they are supposed to improve through experience and better understand how social media posts translate into market movements.

Developers often identify key people with outsized voices and large numbers of followers to weight more heavily in their algorithm, said Bijan Farsijani of Augmento, a Berlin-based startup that launched an algo for sentiment analysis last month.

He said a number of hedge funds had bought the software from his company since the launch.

Background: Bitcoin’s wild ride

Bitcoin, the biggest cryptocurrency and a bellwether for the sector, has surged more than 180 percent this year, driving up the interest of bigger investors from trading firms to hedge funds.

Bitcoin’s most recent rally, last month, was seen by analysts as driven by expectations for a wider adoption of cryptocurrencies driven by Facebook’s Libra.

That move was mirrored by a surge in interest online. Google searches for cryptocurrencies hit their highest level in three months on June 18, when Facebook made the announcement.

It is, however, difficult to pinpoint the chicken and the egg: online chatter or price moves.

“There may be some value in sentiment analysis in crypto, but most of the time what people tweet may be a lagging indicator of the price move,” said Leccese of Bluesky Capital.

“But there is potential,” he added. “People will start looking at this more in the next five to 10 years because there will be diminishing returns because of increased competition in traditional strategies.”

While there is a lack of data specifically for this technique, “quantitative” cryptocurrency funds — which use methods from arbitrage to sentiment analysis — significantly outperformed funds that make longer-term bets in the first quarter of this year, a PwC report shows.

Coders say that they are in increasing demand.

Taiwan-based Marc Howard teamed up with more than 500 machine-learning experts to crowdsource sentiment analysis algorithms, bringing in data from sources including Google Trends, Reddit and development platform GitHub.

Howard said his bitcoin investments using an algorithm beat funds simply tracking the price of the cryptocurrency by 54 percent in the year to June 24, adding that funds in New York and Taipei had tapped him for help in developing their own analysis.

“It’s pretty hot right now,” he said. “Any fund that’s worth their salt, they are devoting some of their resources and allocation for sentiment analysis.”


INTERVIEW: The greatest Arab show on earth — and its legacy

Updated 9 min 23 sec ago

INTERVIEW: The greatest Arab show on earth — and its legacy

  • Marjan Faraidooni explains key role Expo 2020 Dubai will play for the UAE — and Saudi Arabia’s crucial participation

DUBAI: Any skeptics about Expo 2020 Dubai — and there are a few who still have reservations about the extravaganza that will open to exuberant fanfare next year in the UAE — should spend an hour or two with Marjan Faraidooni.

She is the executive in charge of the pavilions and exhibitions on the huge site in south Dubai, and crucially, she has responsibility for “legacy” — what will remain after the show packs up in April 2021. She is calmly confident that the event will be a big success.

“It’s a challenge, but we have the mechanisms in place to make sure we meet that challenge,” she said amid the bustle of the Expo headquarters. It was August, and the holiday season, but there was no sign of any slackening in activity in the administrative hub, nor on the site itself. The clock is ticking down to the opening on Oct. 20 next year.

The scale of the event is mind-boggling. Over six months, the site will be visited some 25 million times, triple the population of the UAE. A previous Expo executive described it as the biggest ever gathering of people in the Arab world. It is expected to give a significant boost to the regional economy, and leave a permanent new city on the southern borders of Dubai.

But the doubters have been nagging away ever since Dubai won the right to stage the world fair in 2013. Would it be ready on time? Would it justify the financial outlay by boosting the UAE economy? Would it leave a lasting legacy or risk becoming a multibillion-dollar white elephant in the desert?

Faraidooni is convinced on all counts. On delivery, she said: “Yes, we are on track and although it’s not my direct remit, as part of the senior management team we are all responsible for doing whatever it takes to get this Expo delivered on time.”

Construction is progressing well. Earlier this year, Expo announced that the three “thematic districts” — reflecting its key themes of sustainability, mobility and opportunity — were complete, with more than 100 million working hours clocked on the site.

Faraidooni said that many of the 192 individual units built by the participating countries or organizations had already broken ground — including the big pavilion housing the Saudi presence — and that key infrastructure and transport around the site was well under way. An extension to the Dubai metro system and new roadways are under construction, as is apparent from the hectic construction activity around the site.


BIO

BORN: Dubai

EDUCATION: Bachelor’s in human physiology and master’s in public health, University of Boston, US

CAREER

• Instructor, Sharjah Women’s College

• Special projects analyst, executive office of Dubai ruler

• Senior manager, Dubai Healthcare City

• Portfolio strategy director, Dubai Holding

• Chief pavilions and exhibitions officer, Expo 2020 Dubai


On the economic benefits of the project, Faraidooni pointed to a recent study by consultants EY which projected a big boost to the Dubai economy and a permanent increase in jobs.

“This Expo is happening in a location that is critical to the development of Dubai as a city and close to a new airport. A lot of infrastructure has been developed not only to service the Expo but for this whole area of Dubai,” she said.

Some economists have talked about the “Expo effect” as a factor that will boost the economy, especially the real estate market, which has been in the doldrums for several years.

That economic development is part of the legacy Faraidooni believes Expo will deliver. “The future is something we think about on a daily basis,” she said. The site will become a new addition to the Dubai urban scene, a mixed-use development called District 2020: A mixture of a business park, an exhibition center and a residential area with retail, leisure and cultural features, based around the Al-Wasl centerpiece.

Two big international corporations — Siemens, the German engineer, and Accenture, the international consulting firm — have already said they will base significant operations on the Expo site once the event ends, and Faraidooni hinted that other big global businesses are interested.

“We think of it as the place that happened to hold the Expo for six months. It will hold all the cultural and educational assets that played a fundamental role in the project,” she said.

We will have thousands of people coming through the doors on a daily basis.

Her infectious enthusiasm for the Expo project — she has been involved in it since the very beginning — is most obvious when it comes to discussing the actual content of the thematic pavilions that form the core of the experience.

She admitted the three key themes of sustainability, mobility and opportunity are “heavy themes, traditionally discussed in the UN and other political environments,” so the challenge has been how to make those accessible and enjoyable as well as informative.

“We will have thousands of people coming through the doors on a daily basis, so how do we quickly send them the Expo message in a way that inspires them and educates them? That’s what I do on a daily basis. It’s one of the best parts of my job,” she said.

As Faraidooni describes it, the sustainability pavilion, called Terra, will be quite an attraction in its own right. Designed by the renowned British firm Grimshaw Architects, the pavilion has a diameter of 130 meters and its roof consists of solar panels that will make it self-sustaining in energy use. “You won’t miss the sustainability pavilion — it’s like a spaceship has landed on the site,” she said.

The “theatrical approach” Faraidooni had adopted in the pavilions involves simulating different experiences that hammer home the sustainability message in Terra. “When you come through the entrance of the building you’ll be given two choices: Do you want to go through the forest, or under the ocean? We take you through chapters of experience that inspire you about the world you live in,” she explained, mentioning an encounter with a “giant fish with stacks of plastic in its belly” to highlight environmental threats.

An aerial view of the Expo 2020 site in Dubai. (Courtesy of Expo2020Dubai.com)

The two other thematic pavilions involve a similar mixture of entertainment and experience, but with a serious message and a flavor of Emirati and Arabic heritage.

In the mobility pavilion, visitors encounter famous Arabic navigators and travelers who led the way in exploration techniques, as well as modern examples from the ports company DP World and Dubai Smart City.

In the opportunity pavilion, visitors will view the world through the lens of the UN sustainable development goals, and what the implementation of those targets can mean for everyday experiences.

No detail is too small. Expo recently announced an international competition to design water fountains for the site — the Sabeel fountain project — which will invite designs for 40 locations around the site, highlighting the role that the communal provision of water has played in Arab and Islamic culture.

Saudi Arabia will be a key participant at Expo. The Kingdom’s pavilion — the second biggest on the site after the UAE’s — is themed on a gigantic mirror rising into the sky, but firmly attached to the ground, “reflecting a society deeply rooted in its culture but with unlimited ambitions,” according to the official statement.

“It’s very advanced, like something out of a sci-fi movie, and very interesting. The Saudi pavilion looks like it’s going to be one of the main attractions on the whole site. We’re very excited about it,” Faraidooni added. Expo rates Saudi Arabia as the second-largest source market for visitors next year, after India, accounting for a significant number of the 11 million anticipated foreign visitors.

Foreigners will make up 70 percent of the visitors to Expo, but the majority are expected from the UAE, who are being encouraged to come more than once, with a program to Emirati and regional schools to ensure youthful participation.

A big role will be played by Emirates Airline, one of the official partners of Expo, which is working on plans to persuade transit passengers to visit the site, as well as tourists on holiday in the UAE. So the goal of 25 million visits, labeled as overly ambitious by some critics, is eminently achievable. “Of course it’s feasible. Everything is feasible,” Faraidooni said.

She is acutely aware that the deadline is approaching. “We’re doing a lot, but there is so much more we could do, but we’re constrained by time. We know we have to open our doors and there is no question about that date whatsoever,” she said.

Faraidooni faces a personal challenge too: What to do once the Expo closes its doors on the last visitor in spring 2021? “This is a once-in-a-lifetime job. Anything I do after this is going to be boring,” she said.