Sentiment-Aware Mean-Variance Portfolio Optimization for Cryptocurrencies

TL;DR

This paper introduces a sentiment-aware mean-variance portfolio optimization method for cryptocurrencies, combining technical indicators and sentiment analysis to improve risk-adjusted returns in volatile markets.

Contribution

It integrates sentiment signals from news and large language models into a dynamic portfolio optimization framework, demonstrating improved performance over traditional strategies.

Findings

Outperforms benchmarks with higher risk-adjusted returns

Incorporating sentiment improves portfolio stability

Strategies face significant drawdowns during market stress

Abstract

Cryptocurrency markets are highly volatile and influenced by both price trends and market sentiment, making effective portfolio management challenging. This paper proposes a dynamic cryptocurrency portfolio strategy that integrates technical indicators and sentiment analysis to enhance investment decision-making. Market momentum is captured using the 14-day Relative Strength Index (RSI) and Simple Moving Average (SMA), while sentiment signals are extracted from news articles with VADER and further validated using the Google Gemini large language model. These signals are incorporated into expected return estimates and used in a constrained mean-variance optimization framework. Backtesting across multiple cryptocurrencies shows that the integrated approach outperforms traditional benchmarks, including momentum strategy, Bitcoin Long-Short strategy, and an equal-weighted portfolio, achieving stronger risk-adjusted returns and more consistent cumulative growth. Furthermore, comparing the sentiment-only and technical-only strategies shows that incorporating sentiment information alongside technical indicators can lead to more consistent performance gains. However, the strategies exhibit substantial drawdowns that coincide with known periods of market stress, indicating that additional risk-management components are required to improve stability.