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Crypto Sentiment Analysis: What is it and how do I use it?
Swen Keller
In the crypto world Swen has consistently found success through his effective communication skills and the unique ability to navigate the details.
From a single tweet to a news report, every piece of information or opinions expressed by a respected entity has the power to significantly influence the market value of cryptocurrencies. This was evident when Elon Musk retweeted a breakup meme and mentioned Bitcoin in the tweet, causing a 3.6% drop in the market price of the currency. This phenomenon is termed as “Market Sentiment”, and it predicts price movements in a market based on the feelings and emotions of its investors.
This guide will explore the importance of market sentiment analysis, provide tips on identifying patterns, and explain how to use market sentiment indicators to understand market price movements.
What is Crypto Sentiment?
Market Sentiment refers to the attitude of the users regarding a particular asset or currency in the market. It tells us how people tend to feel about a cryptocurrency (how likely they are to buy or sell it).
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Sentiment Analysis considers a plethora of factors (called market sentiment indicators) that evaluate how people perceive an asset and assist in prospecting its price movements.
Positive Market Sentiment: Suggests that investors feel confident about the asset and that their investment decisions lean more towards buying the cryptocurrency. Extreme positive sentiment is called Bullish sentiment (optimistic).
Negative Market Sentiment: Suggests that people have little faith in the market and are likely to exit it. (likely to sell crypto assets). Extreme negative sentiment is called Bearish sentiment (pessimistic).
Neutral Market Sentiment: Suggests there is no strong prevailing sentiment in the market, and prices are likely to remain stable.
The Importance Of Crypto Market Sentiment Analysis
Performing a Crypto Sentiment Analysis can significantly benefit crypto investors. In fact, many crypto traders actively conduct a thorough crypto market sentiment review before moving any of their financial assets. Here’s a quick rundown of why sentiment analysis is essential:
Predict short-term price fluctuations of a financial asset.
Look out for potentially profitable opportunities in cryptocurrency markets.
Informed decisions for long-term investment.
Safeguard against herd mentality (by not following a larger group of people without your judgment).
How To Conduct Cryptocurrency Sentiment Analysis?
Although the process can be a bit extensive, it is doable with the right guidance and tools. Follow this guide, and you’ll be sure to improve your existing knowledge of the asset in question, making it easier to navigate through the tumultuous landscape of the crypto world.
Study Market Sentiment Indicators
The finances of most assets are driven by sentiment and emotions surrounding the investors. Market Sentiment Indicators help users visualize and quantify these emotions. Leveraging these indicators can help you with the fundamental analysis of any cryptocurrency market.
Note: Most indicators on the internet usually revolve around the top competitors in the cryptocurrency market, like Bitcoin and Ethereum.
Following are some important Market Sentiment Indicators:
Fear Greed Index
Fear and Greed Index takes quantifiable factors like market volatility and capital and plots them against qualitative factors like perception of community members, emotional tone in social media posts, and trending practices.
Combining these indicators, the index can produce a meter ranging from 0 to 100, where 0 denotes extreme fear, and 100 signifies extreme greed.
Extreme Fear (0-20): Investors will likely sell, and the price will sharply fall.
Fear (21-40): The market may be in a downward spiral, but can bounce back. Prices may be lower, but there are still buying opportunities for investing.
Neutral (41-60): The market is stagnant, there is no obvious sentiment. Signifies a period of stability.
Greed (61-80): Upward momentum in the market, but investors need to exercise caution as it may also indicate an overheated market.
Extreme Greed(81-100): Investors will likely buy, and the price will sharply rise.
You can check these indicators at popular social channels like Alternative and CoinStats.
Track Relevant Social Media Pages
It has become easy for people to voice their feelings publicly, and social media channels have become their medium in today’s age. By following hashtags, particularly Twitter, you can easily make simple assumptions and get a general idea of the market.
Follow Authentic Media Portals
Unlike social media, the information available on well-established blogs like Coin Desk will give you a simplified and factual idea of the crypto market sentiment. They report important statistics, trends, and turn-of-events, which can be used to judge.
Monitor Industry Whales'
The term refers to giants in a market who hold an enormous share of the market with the power to influence the market momentum. Many trading strategies require them to make large transactions that affect market liquidity, leveraging it to their benefit.
Executing this feat is impractical for humans, thus bots are used for this task. You can project where the market may be headed by successfully monitoring them and acting accordingly. You can do this using free whale alert bots, which as widely available online.
Utilize Data Collection Software Tools
We can not emphasize enough how crucial it is to study and interpret an asset’s statistics to project its future successfully. Various tools that are available on the internet can be utilized to study and look out for trends and patterns for an asset, co-relating them with public interest and sentiment.
Examples include: Token Terminal, IntoTheBlock, and TheCoinPerspective
Checkout For the Latest Industry News
There are certain factors beyond the control of the community members. Correctly modifying your attitude in the market based on these factors can help you achieve an advanced understanding of the price movements in a market. Examples of such events are geopolitical disturbances, Celebrities/Experts voicing their opinions, Regulatory changes by the government, Recent Hacks / Security breaches, and more.
Technical And Fundamental Analysis
To take your Crypto Sentiment Analysis to the next level, consider performing a technical and fundamental market analysis. It allows you to take a long list of economic factors that affect the market but are not studied in a market sentiment analysis.
Things like historical patterns, governance, valuation ratios, and oscillators (e.g., relative strength index)
Is Crypto Sentiment Analysis Reliable?
Although Crypto Market Sentiment can provide crucial details about a cryptocurrency, it should never be solely relied upon to predict the price movements of an asset. Why? Because there have been multiple instances when the values of a cryptocurrency soared before crashing down in a freefall.
It doesn’t take into account several major non-modifiable factors, such as government policies, macroeconomics, and company-specific news. Here is an example:
In November 2021, the Bitcoin market saw its prices reach astronomical heights at 1 BTC, equating to around $68,789. This extreme ascend in its value was preceded by massive hype by social media channels, acclamations from official forums, and highly positive public perceptions. But what happened after that is still etched in the darkest pages of history.
The crackdown on blockchain technology by governments worldwide, coupled with the increasing number of security breaches, depreciated it down to half of its original value in just 2 months.
Conclusion: Final Review
The emotions of its users are the cornerstone of the cryptocurrency world, with a significant influence on how the market moves. Successfully harnessing the power of market sentiment can greatly benefit investors, allowing them to make lucrative financial decisions. Precisely performing a market sentiment analysis requires a thorough process of:
Reviewing a market’s social media presence and indicators
Tracking crypto whales and news entities
Statistical analysis using research tools
By integrating these components into your crypto market sentiment analysis, you will be able to obtain a flourishing presence in the volatile environment of the crypto landscape. Remember not to fixate on sentiment analysis alone to make business decisions, but recognize other key market factors and amalgamate their power with sentiment analysis to boost your financial position in the market.
FAQ
Most frequent questions and answers
Fear and greed index. It perfectly reduces the complex intricacies of a market and provides a simple number that can help you make sound and informed decisions.
Yes! Crypto is no different than the conventional stock market. In fact, sentiment analysis plays a much more significant role in the blockchain landscape since an enormous chunk of investors comprises novice traders.
Market sentiment analysis. Compared to other forms of analysis, this certainly tops the list with its high efficiency and simple layout. Best for short-term and moderate gains, while highly profitable in the long-term when combined with other important methodologies such as fundamental and technical analysis.
2017 boom and 2018 crash. Bitcoin lost 45% of its value in a span of just 5 days and saw continued depreciation reaching as low as 80% of its original value. Other currencies saw a similar fate, with many getting entirely wiped off the face of the market, never returning.
A more advanced form of market sentiment analysis. It analyzes information from several data sources and produces a more sophisticated market analysis for Ethereum. The additional information includes upgrades/updates on the blockchain, global economics, and on-chain analytics.
Alternative and CoinStats are the choices of many experienced crypto enthusiasts. Other popular choices include Mudrex, BitDegree, and Coinglass.
Yes, absolutely! Sentiment analysis provides highly efficient predictions of price movements, telling you when to liquidate your asset and when to buy in the market.
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