Boost Returns Trading Crypto: Backtest Using Sentiment

In this case study, we explore how integrating sentiment data into a crypto investment can improve return, accelerate market research, and reduce the fear of missing out (FOMO). We conducted a backtest on the Bitcoin (BTC-USD), comparing the performance of an active, simple sentiment-powered strategy using only Crypto Navigator against the standard Buy-and-Hold.

What Is Sentiment:

Sentiment analysis is the way to figure out if something written is positive, negative, or neutral. It helps understand how people feel about a topic or product. This is very important for investment because it allows to identify extreme points and historically this gave investors much better returns when they are aware of current market sentiment.

How It Is Calculated:

The sentiment data was extracted from the Crypto Navigator, an application developed by Alpha Data Analytics that analyzes insights from over 50,000 global sources in 72 languages using artificial intelligence (AI) dedicated to digital assets, and BTC-USD daily (end of the day) prices from CoinMarketCap.

Sentiment data has been used for daily portfolio re-balance based on whether market sentiment was positive or negative. Specifically, when week-over-week sentiment outpaced the price, the strategy was to buy and hold until sentiment remained higher than the price. Conversely, when the price exceeded sentiment, the action was to sell existent long and take an equivalent short position. For comparability, both sentiment and price were normalized using their rolling z-scores and rolling to ensure no look-forward biases were introduced to mirror the live market setting.

Friction costs and transaction fees are excluded as they are negligible, given the narrow spreads of a highly liquid instrument like the BTC-USD and the infrequent rebalancing, which occurs on average every three days. The period covered the previous year, from February 22, 2024, to the date of writing, February 22, 2025.

Results:

Twice Better Returns: Strategy with sentiment shows three times better returns compared to the BTC-USD Buy-and-Hold over the same period. Annual returnvs.anexcess of