Data on the Data
Episode 9: Tracking the biggest trends in crypto
In this week’s episode of Data on the Data, Dr. Richard Peterson of data analytics firm MarketPsych talks about the evolving trends in the cryptocurrency space and how they can be tracked by analyzing social media. Many of the biggest moves have been preceded by shifts in sentiment that can be picked up from these sources, including changing attitudes toward utility, sustainability, and transaction costs.
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Roger [00:00:06] The world of crypto and decentralized finance is clearly starting to broaden out in terms of products and coin offerings. For institutional investors, Bitcoin remains by far and away the most popular cryptocurrency, with a surge in the volume of users and a staggering increase in hits during the recent period of price volatility. Ethereum has also seen a surge in data usage off a low base. Insights into the changing fortunes of the broader constituency of cryptocurrencies can be gleaned from changes in sentiment across all types of global media platforms. Dr. Richard Peterson of data analytics firm MarketPsych explains some of the trends that can be observed.
Richard [00:00:42] So my company MarketPsych Data, produces news and social media analytics on over three hundred cryptocurrencies. And so for many years, we've been tracking how people refer to those cryptocurrencies in the media along the lines of specific sentiments like HODLing or transaction speed or adoption. So these are specific indexes that we're able to create by pulling out how people are talking about these currencies. And so we can see which currencies, for example, have more references to fast transaction speeds or which ones have more references to adoption in the ecosystem online. And so using that type of data, we have seen that over the years HODLing has seemed to correlate with future returns. And part of the reason is the game theory behind why many of these coins are valuable, which is scarcity. So, for example, with Bitcoin, as the production of Bitcoin declines over time and more users take, buy Bitcoin and hoard it, the scarcity naturally drives up the price. They essentially corner the market of their own asset. And so HODLing, people who 'hold on for dear life' and don't let go, creates more value over time because they naturally push up the value of the token. And so we've seen that HODLing matters, we've seen that code sentiment is also very important, that is how people feel about the underlying code. And then also we have a, we track developer sentiment, so whether the developers of the coin are making positive comments on the on the GitLab sites and the GitHub, and so, you know, what are they saying about this coin? And so we're seeing that when developers are positive, and naturally that's good for the token, and when they're negative, that's not good for the token. And there is a seem to be, there does seem to be a productive relationship between several of those sentiments and coin prices. The sustainability conversation is, I think, incredibly important in the cryptocurrency space because the conversation has originally been about security and privacy with these coins and, of course, storing wealth as an asset. But now that we're looking at sustainability, and now the conversation has turned there, you've seen a collision of two of the major themes of the last two or three years. Even recently articles in The Wall Street Journal describing how coal fired power plants are being revived in order to power Bitcoin mining operations. So there's this great concern, the great theme of the last year or two of sustainability now colliding with, of course, the privacy and libertarianism behind Bitcoin. And that collision is leading of course, much of the market to turn towards alternatives like, say, Ethereum, which is moving towards proof of stake, or others with less energy intensive backings to their coins. So in terms of utility of course, transaction speed is necessary and one of the of course the other major complaints about Bitcoin and Ethereum, which are the leaders right now, is the slow speed. So there are other coins like Cardano and Solana that are coming out with much faster transaction speeds, because of course, if we have to wait a day for the proof of the transaction, in many ways is coming to parallel a bank. As Peter Thiel has said, we need a 10 times benefit from any new technology before it really be adopted, and a three-fold benefit isn't going to cut it. You need fast transaction times. And then, of course, the cost of the transaction is of course very high as well, partly because they are limited in terms of the amount of transactions that can occur per second. So you have to pay, for example, with Ethereum a gwei or gas fee in order to convince a miner to take your transaction and prove it on the blockchain. And those were quite expensive, 70 dollars, sometimes more than 70 dollars for one transaction, which of course, you can't buy a coffee if your transaction costs 70 dollars and takes a day to reconcile. So we have to have faster coins ultimately for that utility, and some of these coins that don't require massive amounts of energy for security like the digital yuan or the US dollar once that's digitized, those will likely take over for much of the digital payment space, if they are done in time and with security. However, of course, when central government's control the currency, then you have a lot of skepticism about whether that should be something people want to use. And a libertarian side will probably try to move towards some of these faster coins for transactions. Are there shifts between these coins that are going to be long-lasting and enduring? I've certainly been through many of these cycles since 2011 and we've seen shifts happening and there's been many new coins, Feather coin was supposed to be faster and easier than Bitcoin, for example. Litecoin has always been there in the background. These shifts have been just talked about every time there's one of these explosions of interest, and so far Bitcoin has outlasted everything. And Ethereum, however, did emerge and did become the second horse in the race. And there are good reasons for that, so will that shift ultimately occur towards Ethereum? I, I think it will because of the lack of energy cost behind it and the trusted stakeholders who will be proving out the blockchain. So beyond I think that's going to be the next big thing is what is, who can be trusted to ensure this integrity of the coin? Do you want anonymous miners who use coal fired power plants or do you want people who are generally trusted and have a stake in the value of the coin? And I think that's, that's one reason for the enthusiasm and with Ethereum is because when they move to proof of stake, people have realized that large holders of Ethereum are going to be well rewarded, because those who are proving the blockchain are going to be themselves incentivized to ensure that there's value created.
Roger [00:06:11] Volatility within the crypto space is part of that journey from niche towards the mainstream. But that doesn't make it any easier for those who are trying to navigate the sector. Bitcoin and Ethereum remain the headline grabbers, but the future performance of individual coins can often have its origins in changing sentiment towards key issues such as utility in adoption, transaction speeds and costs, issues around sustainability and even the momentum in mentions of the HODLing of a particular coin. Increasingly, it's clear that following the trends on social media within this space will help investors pick up changes in price momentum.