4 Major Benefits Alternative Data Providers Bring to Cryptocurrency Traders and Investment Firms
Alternative data providers are rising in demand among cryptoasset traders and investment firms. Why is this growth happening?
For starters, the volatile and unpredictable nature of cryptocurrencies makes the market incompatible with conventional analysis techniques. It cannot be measured accurately solely with the types of data used in traditional financial markets since cryptoassets are a different beast in terms of price actions and the events that trigger them.
Proactive traders realize this problem, hence why they’re leveraging alternative data sources to help them make faster and smarter decisions in crypto markets. Results have been great so far, which is not a surprise considering alternative data has already proven its viability in other financial markets.
In this article, we’ll discover the role of alternative data providers and how they benefit cryptoasset investors in making better trading decisions.
What is an Alternative Data Provider?
When we talk about financial data, the usual suspects like cash flow sheets, performance projections, tax filings, and other financial statements come to mind.
Though valuable, they don’t give the full picture of how a company is doing. In today’s data-driven landscape, investors require more than endless numbers on spreadsheets. They need insightful data that is actionable enough for them to make informed decisions in the market.
Certain markets like cryptoassets also don’t revolve around traditional financial data sources. Cryptocurrencies like Ethereum or Bitcoin cannot be analyzed efficiently with financial statements since their prices are determined by factors outside of commonly used data sources.
This gap is filled by alternative data. As the name suggests, alternative data is information derived from non-traditional sources — like social media and consumer trends — that help investors obtain more in-depth insights on investment vehicles.
Alternative data providers are the ones responsible for collecting, cleaning, analyzing, and making sense of data collected from non-traditional sources. A provider, for example, may assess how the community is reacting to a cryptoasset to predict its value and price movements in the future.
With alternative data, investors gain access to unique and relevant data that helps them identify golden opportunities in the cryptoasset space. When combined with traditional financial data, cryptoasset investors are able to make informed trading decisions to turn consistent profits and gain an advantage over other investors in the market.
Why Is Alternative Data Crucial in the Cryptoasset Space?
Like every other financial market, data is the most influential factor in making investment decisions, especially today when most funds are managed by machines.
A study by BNY Mellon concluded that 56% of hedge funds employ machine learning and AI to “inform investment decisions” while 25% of respondents used them to perform automatic trade executions.
Machine learning is used heavily in managing cryptoassets as well due to the technical nature of the blockchain industry. To enhance the efficiency of funds powered by machine learning, managers are feeding their algorithms with alternative data like social media, project development status and media sentiment to name a few.
Alternative data not only empowers machine learning fund performances, but it also gives managers greater knowledge and confidence in making profitable manual portfolio decisions. This directly benefits the alpha generating capacity of cryptocurrency traders and investment firms, which is a good thing for all parties involved, including crypto markets.
4 Major Benefits of Alternative Data Providers to Crypto Traders and Investment Firms
1. Gain Relevant and Valuable Market Info from an Extensive List of Data Sources
The main problem with crypto data sources is that they’re highly fragmented and unorganized. Traders would have to comb through multiple sources continuously just to learn more about a cryptoasset and its current status. Worse, the data gathered could be incomplete or irrelevant in assessing the true value of a cryptocurrency.
Another issue in the blockchain industry is that many cryptoasset research platforms simply collect and regurgitate existing info from the websites of companies. Such data aggregation is useful but it does little in helping traders and firms make informed decisions.
Alternative data providers overcome this knowledge gap by collecting and thoroughly analyzing data from an extensive list of sources. Analyzing what the community is saying on social media and forums (e.g. Reddit), assessing media stances, checking if development teams stick to their roadmaps — these are all valuable and actionable insights traders gain when they work with alternative data providers.
Again, more relevant and accurate data will allow traders and investment firms to gauge the actual value of cryptoassets and make profitable actions in the market consistently even in volatile times.
2. Make More Sense of Community and Media Sentiment
Alternative data providers allow traders to understand the sentiment of the community and media of their targeted cryptoassets. Sentiment analysis works by processing and analyzing data generated by the public, usually text-based sources. The results are then used to predict whether the market is bullish or bearish on an asset or the industry as a whole.
Sentiment analysis has shown good results in generating sizeable returns for cryptoasset traders. One notable example is Ciaran McAteer’s study on the effect of Twitter sentiment on bitcoin prices. McAteer was able to prove a positive correlation between the two, with prices changing based on sentiment within 24 hours.
The findings of sentiment analysis can give traders an advantage in making early market decisions, which brings us to our next point.
3. Uncover Trends and Potential Market Shifts Earlier
The points mentioned above allow traders to uncover trends in the market and predict price movements faster.
Analysis from alternative data sources can provide potential short-term signals for traders to execute trades ahead of price movements, opening up profitable opportunities before the rest of the market catches up.
4. Less Time Is Spent on Market Research
With up and down price movements happening every second, cryptoasset traders have no time to waste on finding the right resources to perform market research. Alternative data providers solve this problem by taking on the workload of researching cryptoassets. Professional teams specializing in and focused completely on research and analysis can do the job much more quickly and effectively than traders or fund managers.
By engaging with alternative data providers, traders have more time and energy to work on higher-level and strategic tasks like balancing portfolios, for example.
Why Blue Swan is the Ideal Alternative Data Provider for Cryptoasset Investors
For investors, making informed trading decisions is only achievable if they have access to the latest crypto updates and in-depth market insights. This is where the right crypto market intelligence system comes in handy. A professional-grade, multi-channel big data platform like Blue Swan gives investors everything they need to know about the latest cryptocurrency news and analyses in the industry to make informed trading decisions.
Blue Swan Grading benefits investors immensely by offering a comprehensive crypto analytical framework that aggregates and analyzes essential data from a diversity of sources, offering a comprehensive market overview.
Blue Swan does everything from analyzing news and media coverage to assessing project development status. The platform also takes into account the skills and reputations of the teams behind crypto projects while keeping up with their regulatory compliance (or lack thereof). In short, the platform offers unbiased market analysis and project ratings and classifications that investors need, allowing them to make faster and smarter trading decisions.
Blue Swan Grading also offers API tools and customizable features for developers to make full use of the platform.
Be one of the first to benefit from Blue Swan Grading by signing up for our free 7-day trial.
