Sourcing & trading based on alpha as a narrative gets thrown around a lot. So, we felt we’d break down what is alpha & how to identify the most important one- social alpha.
But, what is alpha?
For beginners, alpha is any information that provides an edge to you in terms of trading; something that helps you generate above average returns.
For traditional market instruments such as stocks, commodities, etc, there are well-established channels for the companies to issue press releases and traders follow these channels to keep up to date with the market. All fundamental data is readily available for the traditional markets via annual and quarterly filings which has become easy to access, thanks to the internet. Since the traditional markets have matured, there is no information asymmetry for traders to take advantage of (unless its insider info) .
Since crypto markets are still in their nascent stages, the distribution channels of information are fragmented and immature, which presents the perfect opportunity for us to generate alpha by digging out quality insights.
“The cryptocurrency market is, in fact, the perfect environment to exploit asymmetric information,”
- Raj Kapoor, founder of the India Blockchain Alliance (To CoinTelegraph)
He also added
“Those who have the information and can time the market, make money and drive the prices. Inconsistent and non-aligned crypto exchange regulation fosters this environment.”
But before understanding alpha better, we need to understand the driving forces behind token prices -
Tokenomics - Tokenomics refer to the economic design and model of a cryptocurrency or token. It includes factors such as the total supply of tokens, the distribution of tokens, and the incentives for token holders. This can have a significant impact on the value and adoption of a cryptocurrency or token, and it's important for traders to understand the tokenomics of an asset before making an investment.
Social Alpha - Social alpha, on the other hand, refers to the additional return that a trader can achieve by incorporating social media and other online sources into their investment decisions. Social alpha can be influenced by factors such as market sentiment, news and trends, and the opinions of other traders and experts and hence it's always a good idea to do your own research and consider multiple sources before making any investment decisions.
Now let's dig deeper into Social alpha -
There are several channels through which traders can find social alpha in crypto:
Social media and Communities: Social media platforms such as Twitter, Discord, Reddit and Telegram are popular channels for finding social alpha in crypto. These platforms provide a wealth of information and insights from traders, experts, and other industry stakeholders. By following relevant accounts and participating in the right communities, traders can stay on top of the market. For example, db is a popular account for crypto market news and zachxbt is a popular account for on-chain analysis. Similarly, there are many discords known for providing high quality alpha.
Blogs and substacks: Blogs and susbtacks are another great source of information for finding social alpha in crypto. These platforms often feature in-depth articles and discussions on a variety of topics ranging from tokenomics breakdowns to de-fi deep dives. By following the right, traders can gain a better understanding of the market and make more informed decisions. Do ping us to get a curated list of all crypto substack links weighted by their popularity.
But then where is the problem? Why are most traders taking massive losses?
The main reason why traders are taking losses is because they enter trades at the peak when the narrative has died down and everyone is selling.
Like cobie says, in his popular piece ‘Trading the metagame’
Staying ahead of the public narrative is difficult because of the following reasons -
Information overload: With the proliferation of social media and other online platforms, it can be overwhelming to sift through the vast amount of information available on the crypto ecosystem. It can be challenging to determine which sources are reliable and which ones should be disregarded, and it can be time-consuming to research and analyze all of the information available. On top of that, making sense of the already complicated chain data in sync with the social data is an added burden.
Complexity of the crypto ecosystem: Crypto is complex and constantly evolving, which can make it difficult for traders to keep up with the latest developments. This can be particularly challenging for traders who are new to the market and may not have a solid understanding of the underlying technologies and protocols.
Lack of regulation: As mentioned earlier, the cryptocurrency market is largely unregulated, which can make it challenging for traders to obtain reliable and accurate information. This can make it overwhelming to research social alpha, as traders may not have access to the same level of transparency and information as they would in a more regulated market. Also the access to information is broken, where institutions get access to quality information via paid tools which are too expensive for a retail trader.
Risk of misinformation: Researching on social media without context is risky, as people might be shilling out narratives with an ulterior motive (pumping their own bags). This can make it overwhelming for traders as they may have to wade through a large amount of false or misleading information in order to find reliable sources.
These problems exist due to the very nature of the information channels in crypto being fragmented. Hence the most successful traders are people who get access to quality information fast. This enables them to spot good projects in the obscure space, waiting to become popular.
Here is an example of a trader who took advantage of social alpha and executed a solid trade -
Explanation: Andre is well-known in crypto- popularly known as the ‘godfather of de-fi’ for creating Yearn Finance and multiple other de-fi protocols. He was also one of the co-founders of Fantom. In March ‘22, he had revealed he’s quitting all his projects and taking a break from space. At the beginning of November, Cronje made a comeback, which was bullish for Fantom. You can read the entire thread here.
Generating alpha in crypto isn’t a function of time spent but is a function of access to quality data. Access to clutter-free information alone can change the game for crypto traders.
That is exactly what we are trying to solve at Supermind. We are indexing all social data from telegram and twitter in one place itself, which will help you to discover early crypto projects in less time. Try it out yourself by clicking on the button below
So the next time you are about to join a crypto telegram group or follow on Twitter, spend some time thinking whether it will add value or just be noise.
Until next time!