Investors in the crypto space are always looking for an edge to generate good returns. One way to gain a competitive advantage is to monitor market sentiment, which can be done by analysing social media channels and crypto-focused forums. Crypto traders often use ‘sentiment’ as a secondary indicator when combined with other factors such as technical analysis or fundamental analysis. In this article, we discuss what sentiment means in the context of trading and what are indicators.

An Introduction To Crypto Market Sentiment

Many traders analyse the market’s sentiment to predict the short and mid-term potential of a crypto asset. Along with the technical and fundamental analysis, investigating the crypto market sentiment can be a valuable addition to a trader’s toolkit. An investor needs to correctly track the general mood of the market players and act on it to reap maximum returns on investment. 

One example is that of the recent Dogecoin bull run caused by a positive tweet from Elon Musk. Most investors purchased the Doge as a result of the positive social media hype.

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Benefits of market sentiment analysis

Market sentiment analysis provides valuable information to crypto investors and helps them understand whether their investments are in line with the overall mood on the market or not. The following reasons explain why cryptocurrency enthusiasts should use this particular type of research: 

  • A Better Understanding: Market sentiment analysis can help to understand the market’s future price movements better. It is also a great way to determine whether investors are optimistic or pessimistic towards an asset, which might be helpful in making a profit in both bearish and bullish trends.
  • Identify Potential Opportunities: Crypto market sentiment analysis helps traders identify potential opportunities that they could not have found using other trading strategies alone. The results of this kind of research may enable you to make better trades by taking into account all aspects impacting prices instead of just focusing on technical signals.
  • Trade Safely: Analyzing the market sentiment of a specific asset could be helpful for spotting scams or detecting when a particular token has reached its peak and is about to drop. For instance, if most investors turn pessimistic towards an altcoin, this might indicate that it will soon start dropping in price.
  • Identify Overvalued Or Undervalued Coins: Crypto market sentiment analysis can help you find new trading opportunities by identifying assets that are currently being ignored by other traders but have a high potential for future growth. This kind of information can also allow beginners to avoid risky investments with little potential upside while investing in crypto assets that they believe will increase in value over time.
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What are the market sentiment indicators?

Several market indicators can be used to determine market sentiment and improve trading performance. Here are a few:

The High-Low Index

One of the most popular crypto sentiment indicators is called The High-Low Index. This index measures how often a coin was traded above its previous price over a certain period, and as such, it represents the traders’ interest in buying at this level. One can use it to determine whether or not you should buy into an asset that has been falling through support levels — if more people are willing to sell their coins than those who want to hold them, then there might (and probably will) be another drop coming up very soon. However, if fewer people decide to take profits, and instead they start increasing their holdings after each fall, this means that we’ve reached “support” levels where everyone panic sold previously; these could potentially become good buying opportunities.

Bullish Percent Index (BPI)

The Bullish Percent Index (BPI), created by the famous technician Tom DeMark, is one of several market momentum indicators used to forecast price movements. It measures the strength of a trend’s upward or downward movement and helps determine whether bulls or bears are currently more robust. The BPI is calculated as follows:

BPI = 100 – the percentage of assets at new lows for that day.

Bull markets are characterised by high BPI values, generally over 90%, and many assets advancing. The market is said to have “momentum” or be in “high gear”. In other words, the bulls dominate. At this stage, it’s best to buy new assets as they break out from sound bases while holding onto your current holdings that show strength through higher price levels. It can also be profitable to buy small amounts into emerging leaders that become breakout stars after their first significant increase off a low base following a distribution period(accumulation).

Bitcoin on the market

This indicates that if the value of Bitcoin falls in the market, the other currencies might also fall. Furthermore, the bullish per cent index is way under 50% in this case. But if the value of Bitcoin increases, this doesn’t guarantee that other currencies will also rise.

Moving average

The Moving Average index ‘snapshots’ average prices during a certain period of time. Investors mostly use the 50 days simple moving average and 200 days moving average to determine market sentiment. If the 50-day moving average is higher than the 200-day, it might be a good time to purchase as this means that price has been increasing over time. However, if you are looking for short-term investments and want quick returns, investors recommend using the one-hour or two-hour charts for these trades because they react faster to market changes.

How to perform crypto market sentiment analysis

To learn the general mood of the market, sentiment analysis is only complete with the inclusion of other types of research.

Polarity Analysis

This type of analysis ranks textual sentiment in a positive, negative or neutral way. Polarity can be measured using online sources such as Twitter, Reddit, etc. The data from these sources are then boiled down to their essence through an automation process that filters out all non-relevant text or noise.

Tone Analysis

This type of analysis scores the different kinds of emotions and opinions that are shared on the web about a particular crypto asset. The data is aggregated from various sources and has to be notarized, such as Reddit or Twitter posts. A positive score means that traders tend to express themselves with words like ‘good’, ‘great’ etc., while negative sentiment implies adjectives like ‘bad’ or ‘terrible’.

Aspect Sentiment Analysis

This type of analysis focuses on interpreting the sentiment about specific subjects within a sentence rather than a sentence as a whole. In the previously mentioned example of Elon Musk’s tweet, the aspect analysis will determine the sentiment related to ‘Dogecoin’ instead of the complete sentence.

The Bottom Line

Crypto market sentiment is a valuable metric that can be analysed alongside technical and fundamental analysis. When investigating the crypto market, it’s crucial to consider all aspects of the environment to make an accurate prediction about its short-term potential. Mixing the various types of analyses will give you a more comprehensive view of what could happen in the future for any given cryptocurrency. With this knowledge, you’ll have everything you need to confidently invest your time and money confidently!

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