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Sentiment-Aware Mean-Variance Portfolio Optimization for Cryptocurrencies

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  • Qizhao Chen

Abstract

This paper presents a dynamic cryptocurrency portfolio optimization strategy that integrates technical indicators and sentiment analysis to enhance investment decision-making. The proposed method employs the 14-day Relative Strength Index (RSI) and 14-day Simple Moving Average (SMA) to capture market momentum, while sentiment scores are extracted from news articles using the VADER (Valence Aware Dictionary and sEntiment Reasoner) model, with compound scores quantifying overall market tone. The large language model Google Gemini is used to further verify the sentiment scores predicted by VADER and give investment decisions. These technical indicator and sentiment signals are incorporated into the expected return estimates before applying mean-variance optimization with constraints on asset weights. The strategy is evaluated through a rolling-window backtest over cryptocurrency market data, with Bitcoin (BTC) and an equal-weighted portfolio of selected cryptocurrencies serving as benchmarks. Experimental results show that the proposed approach achieves a cumulative return of 38.72, substantially exceeding Bitcoin's 8.85 and the equal-weighted portfolio's 21.65 over the same period, and delivers a higher Sharpe ratio (1.1093 vs. 0.8853 and 1.0194, respectively). However, the strategy exhibits a larger maximum drawdown (-18.52%) compared to Bitcoin (-4.48%) and the equal-weighted portfolio (-11.02%), indicating higher short-term downside risk. These results highlight the potential of combining sentiment and technical signals to improve cryptocurrency portfolio performance, while also emphasizing the need to address risk exposure in volatile markets.

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  • Qizhao Chen, 2025. "Sentiment-Aware Mean-Variance Portfolio Optimization for Cryptocurrencies," Papers 2508.16378, arXiv.org.
    • Handle: RePEc:arx:papers:2508.16378
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    References listed on IDEAS

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    1. Florentin Șerban & Bogdan-Petru Vrînceanu, 2025. "Mean–Variance–Entropy Framework for Cryptocurrency Portfolio Optimization," Mathematics, MDPI, vol. 13(10), pages 1-10, May.
    2. Radu Lupu & Paul Cristian Donoiu, 2025. "Sentiment Matters for Cryptocurrencies: Evidence from Tweets," Data, MDPI, vol. 10(4), pages 1-13, April.
    3. Brauneis, Alexander & Mestel, Roland, 2019. "Cryptocurrency-portfolios in a mean-variance framework," Finance Research Letters, Elsevier, vol. 28(C), pages 259-264.
    4. Sana Gaied Chortane & Kamel Naoui, 2025. "The End of Mean-Variance? Tsallis Entropy Revolutionises Portfolio Optimisation in Cryptocurrencies," JRFM, MDPI, vol. 18(2), pages 1-30, February.
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