Much has been written about the impact Elon Musk’s tweets have on the Tesla share price and crypto markets. For the 12 month period between February 2021 and February 2022, Elon tweeted 13 times about Bitcoin. Some of these tweets caused wild price changes in Bitcoin. Notably, Elon announced that buyers would be able to purchase Tesla’s with BTC, before backtracking and announcing that Tesla will actually not accept BTC due to environmental concerns! Despite such events, through our analyses, we could not identify any potentially profitable trading signals with regards to Elon’s tweets mentioning Bitcoin. We feel that, for the most part, Bitcoin markets are simply too big for even Elon Musk to meaningfully impact! Dogecoin however, is a different matter…
Dogecoin, developed as a ‘joke’ payment system and the world’s first ‘meme’ coin is a reoccurring theme amongst Elon’s tweets, he tweeted about it 25 times between February 2021 and February 2022. With Dogecoin markets being smaller that those of BTC and notoriously volatile, mentions by Elon in his twitter stream can have huge effects on the price, albeit for only a matter of minutes. Here, we will demonstrate how we can identify Elon’s tweets about Dogecoin and trade successfully in an automated way on Dogecoin markets!
The foretale backend streams Elon Musk’s live Twitter data to a signal node. With this data, we analyze Elon’s tweets for mentions of Dogecoin or Dogecoin related phrases in realtime. In many cases, Elon tweets only an image or a meme. To understand if such an image mentions, or is related to Dogecoin, we run advanced Optical Character Recognition software over the image to pickup any mentions of Doge. If a tweet is identified as mentioning Dogecoin, our trading node can be modified to instantaneously place a market order for a specified amount of Dogecoin on any major exchange.
To backtest this flow over the period February 2021 until February 2022, the following approach was taken:
The historical data shows that after Elon’s tweet there is a sharp, almost immediate rise in Dogecoin price, before the price decreases back levels similar to it’s pre-tweet value. It is this abrupt rise in value that we wish to taken advantage of, buying Dogecoin immediately and selling at the optimum amount of time after Elon’s tweet.
To decide on the best trading strategy to deploy a trading engine simulation was created using the Foretale trading engine simulator. Although creating a perfect simulation is notoriously difficult, our trading engine tries to take in as many real world factors as possible. The engine can simulate any major crypto exchange and market, taking exchange specific fees, slippage and liquidity into consideration. For this use case we have chosen to simulate the DOGE/EUR market on the Binance exchange. Our simulation iterates through all minutes in our timeframe, buying Dogecoin with Euros whenever a tweet from Elon Musk mentions Dogecoin. We then plot average expected % return on investment for the bought Dogecoin if we were to sell the Dogecoin 1,2,3,…59 minutes after Elon’s tweet.
For all Dogecoin trades, the highest average expected ROI % occurs if we were to hold on to the Dogecoin for only two minutes before selling it again. Were we to do this, historically, the average expected ROI % would be over 2% profit, taking into account all and any exchange relevant fees.
Adding up the expected ROI % for all Dogecoin trades between February 2021 and February 2022, buying immediately after Elon’s tweet and selling after holding for 2 minutes, our expected compound ROI % is over 50%. This is not a bad return on investment taking into consideration how little time in total the capital is exposed to volatile Dogecoin markets!
An added complexity of simulating a trading strategy based on Elon Musk’s tweets is how best to simulate the fraction of a second between Elon’s tweet and completing a market order for Dogecoin on an exchange. Intuitively, many people will be attempting to buy Dogecoin after a tweet from Elon Musk, and as such simulating the behavior of an exchange on such a granular level is quite tricky. We could assume that our trading strategy ought not be affected by the mad rush to purchase Dogecoin after a tweet; such an approach would promise average expected ROI % of much higher than 2%! This would however not be a fair or realistic assumption to make. Although our approach is fully automated, we should expected some fractional delay between receiving Elon’s tweet and a successful purchase of Dogecoin. To simulate this, we tell our trading engine to buy Dogecoin at a price weighted between the price directly before Elon’s tweet and the price at the nearest minute after the tweet. This should help ensure a more robust simulation and includes some acknowledgement in our simulation that our buying market order may well get caught up in the Dogecoin buying frenzy that obviously occurs immediately after Elon tweets about it!
How would we expect this flow to work in the future?
In the 12 months investigated for back testing, Elon Musk tweeted less than 30 times about Dogecoin. It should be noted that this is not a very large statistical sample. Additionally, nobody, perhaps even Elon himself knows when and if there will be any more tweets about Dogecoin from his account! From this perspective how the strategy will operate in the future is unclear. Perhaps Elon’s love for Dogecoin continues to grow or dwindles in time. Perhaps Shiba Inu coin becomes Elon’s favorite meme coin instead! In which case, this flow can simply and easily be modified to scan for Shiba Inu coin mentions and to trade on Shiba Inu markets instead. In any case, were a trading flow deployed on the cloud for the time frame we investigated for Dogecoin, the expected returns would have been much pleasing : )