Investing in any asset, including cryptocurrencies, a supremely important activity for investors is to check the fundamentals and historical trends. However, these analyses are not enough, as one more factor plays a major role in directing the market in a certain direction–market sentiment. For investing in cryptocurrencies, it is crucial to understand crypto market sentiments. This is nothing but investors’ emotional analogy.
The crypto market has grown exponentially in the last few years. As of 2022, crypto ownership has grown by an average of 4.2%, with over 320 million users worldwide. Crypto market sentiment analysis is the key to understanding the impact of investors’ beliefs, moves, attitudes, etc., on the price changes in the crypto market.
So, the question is, how do crypto market sentiments affect your investment, and why should you analyze them?
What Is Crypto Market Sentiment?
The crypto market is volatile, and the perception of investors has a major impact on the price movements that occur. A tweet or a TikTok video by an influencer has the power to move investors emotionally and change the course of their actions.
The mood of the investors can have a significant impact on the market cycles. If a lot of investors act on their guts, feelings, or online information (factual or not), it can cause big price turns in the market and raise or sink your investments.
That’s why as an investor, you have to keep a check on such emotional aspects of investing. Crypto market sentiment analysis can help you here.
Crypto market sentiment analysis is the emotional analysis of the price movements for a certain crypto asset or crypto market as a whole. It combines the mass psychology of the investors collected from various metrics.
Bullish and bearish are two common terms in the investment space denoting two major sentiments of investors.
- Bullish refers to investors believing that the price of cryptos will rise, and they will start investing more in that asset.
- Bearish refers to investors believing that the price of cryptos will fall, and they will start selling their positions.
One thing for you to note here is that since sentiment analysis is not based on numbers or technical values, you should also conduct technical and fundamental analysis with this psychological factor. For example, you can use technical analysis to find if your FOMO (Fear Of Missing Out) for the sudden rise in the crypto market is accurate or just a chain reaction due to herd mentality.
P.S. Before going further, explore Coin Sets – expert-managed crypto baskets based on varying themes.
What Are the Types of Sentiment Analysis?
You can use three major crypto market sentiment analyses to know if you should undertake investment or not. Let’s understand more about these analysis types.
1. Aspect Sentiment Analysis
Aspect sentiment analysis assesses the sentiment of particular words, topics, and adjectives in a sentence rather than the complete sentence. For example, if a prominent personality tweets about buying particular crypto, his followers are likely to make the same move. You can refer to the rise of Dogecoin for this matter. The result would be an increase in price for that cryptocurrency. In that tweet, the sentiment will be analyzed against that particular “Crypto” referred, and not the whole crypto market.
2. Polarity Analysis
This type of analysis checks a sentence and decides if its intent is positive, negative, or neutral. It takes into account the different feeds, statistics, blogs, and tweets and polarizes the tone in them. For example, “Bitcoin has the highest value right now” will be deemed as positive by the polarity analysis.
3. Tone Analysis
Tone analysis pinpoints different emotions in a particular text. Greed, sadness, excitement, happiness, anger, despair, etc., are popular market sentiments. For example, the statement, “Come and grab your chance to make millions investing in the crypto market now,” shows ecstasy, greed, and joy.
Benefits of Crypto Market Sentiment Analysis
Before making a crypto investment, analyzing any available market information is crucial. Just like defining the right technical and fundamental strategies, reading general emotional intent is important. There are a bunch of benefits to conducting crypto market sentiment analysis, as listed below.
1. It helps understand the price movements
Market sentiment analysis helps define future price movements and helps you align your investment with them. Bitcoin, the largest cryptocurrency, is currently struggling to break the $20k mark with the fear of global tensions and investors expecting more rate hikes. This fear can be translated to investors being cautious about pouring their money which can reflect in the Bitcoin price in the near future.
2. It helps prevent emotional decisions
Market sentiment helps you take control of your emotions and make a calculated decision instead of being vulnerable to market volatility. An emotional approach to investing can lead you to FUD (Fear, Uncertainty, and Doubt). These emotions can prompt you to react to situations resulting in a loss of the principal amount. Emotions trigger sudden reactions, which might seem the right move at the time, but they become a prime prospect of losing money later. Hence, as an investor, using sentiment analysis can help you avoid rash decisions.
3. It helps reap more gains
Market sentiment analysis provides better insights into crypto assets’ short-term and long-term movements. These include funding rates, crypto adoption rates, open interest, exchange flows, NVT (Network to Value Transactions), etc. These metrics help you make an informed decision that has a fundamental value to grow your funds. They also help you avoid trades based on vanity and rumors. It helps you use an approach that is aligned with your goals.
How to Conduct Crypto Sentiment Analysis?
Collecting news, opinions, thoughts, etc., is important to understand the crypto market sentiment. However, this cannot be done haphazardly. You need to level up your game for conducting research on investor emotions. To help you achieve that, here are the basic steps you need to undertake.
1. Keep a tab on social media
If you’re interested in an asset, you need to stay updated with the different mentions of that crypto on social media. You can do this with different data collection tools that you can customize according to your needs. Additionally, join Reddit communities and Discord channels, and follow different project officials to stay updated with new updates.
2. Stay updated with the latest news
Follow the news on different crypto channels like Coindesk, The Black, Cryptopolitan, CoinTelegraph, etc. This will help you decide your moves in advance and ensure that you can have the first-mover advantage. You need to develop a focus on demand for cryptos, regulatory announcements, fall-triggering events, prominent frauds, investor outlook, and other action-instigating moves.
3. Watch the crypto investor movements and market trends
Trace the movement of the cryptocurrency markets. Use tools like a Whale Alert monitor that will help you track the activity of big holders in the crypto market. Crypto whales dominate the price movements of different crypto assets, and it helps you gain an edge in your investments. Also, you need to gauge the hype around a crypto topic. For example, you can use Google Trends to find if a topic has positive or negative sentiment. This will help you with forecasting price movements in a little advance.
4. Use market sentiment indicators
Use different indicators to know the general trends in the market, such as the fear and greed index. Market sentiment indicators help present the sentiment graphically or on charts and decide whether a particular asset would be a good move for you. These sentiment indicators give an overview of the investors’ psychological mindset and push you toward profit-inducing opportunities in the market.
Types of Market Sentiment Analysis Indicators
There are multiple indicators to analyze the market sentiment. These are:
1. Bullish Percent Index (BPI)
This index defines the assets that have a bullish perception in the market. Neutral markets contain a bullish index of around 50%. When the market is highly optimistic, the BPI is typically above 80%, leading to overbuying of cryptos.
2. The high-low index
This index compares the assets having 52 weeks high and 52 weeks low. The range for calculation ranges between 0-100. If this index is under 30, the asset is trading at a low, while any rating above 70 indicates bullish market sentiments. This index helps map the weakness and strengths of a crypto asset.
3. Fear & greed index
The crypto market is often led by emotions, and as an investor, you should analyze these sentiments to understand if the market is more greedy or fearful. Sometimes, when the market value increases, the investors become greedy and attempt to bag all the opportunities. But, when the market value falls, they fear losses and sell frantically. And this movement brings sudden fall and rise in prices. This is indicated by the Fear & Greed Index, which ranges from 0 to 100, with 0 being the extremely fearful market sentiments.
4. Social media sentiment analysis
Knowing about the next big social media news is crucial for a modern investor. A viral crypto video or tweet can result in huge waves of change in the market. Sifting through different crypto mentions over multiple social media outlets is not possible manually. Still, you can use automation tools that will help you find all the newsworthy topics with a simple search.
Examples of Positive & Negative Tweets That Affect Crypto Market Sentiment
Here are some examples of positive and negative tweets that lead to different decisions in the cryptocurrency market.
This tweet by SpaceX founder Elon Musk on June 19th, 2022, triggered a jump in the price of Dogecoin and also prompted investors to buy it since people felt that if a prominent personality is backing it, it must be a fruitful investment.
As soon as Elon Musk tweeted this, the price of Dogecoin jumped by 10%. This tweet created a sentiment of excitement and led to a herd decision towards holding and buying the coin.
Elon Musk has a surprising influence over the crypto market. As you can see in this tweet, he calls Bitcoin fiat money, which completely voids its purpose.
After this tweet by Elon Musk on May 13th, 2021, the price of Bitcoin fell by 5% within minutes. This sudden fall spooked investors, and they started selling, triggering a mass response.
Such tweets often create a false sentiment in investors to make a move even though it’s not validated by a fundamental value. Bots account for 15% of the crypto tweets made online, most of which are just to rake in more views. To overcome this drawback, we need to instill a holistic approach to defining market sentiment based on polarity, tone, and emotion.
The cryptocurrency market is volatile; the value of crypto can go up as fast as it falls. Social media news often leads to erratic behavior, but these trends often die after some hype. Thus, conducting crypto sentiment analysis is essential. Understand that the sentiment will usually stay neutral if the news online is from a credible source. The key is to be on top of your game and invest money after doing your research.
1. What is a crypto fear index?
The crypto fear index determines the sentiment of investors from extreme fear to extreme greed, ranging from 0-100. Extreme fear indicates a buying opportunity because other investors are too worried. However, you need to make sure that the cryptos have fundamental value at that point to be good investment options.
2. What is the best sentiment indicator?
The Fear & Greed index is currently the best sentiment analysis you can use because investors are very emotional. You should analyze the sentiments of fear and greed to get an idea of that.
3. What is a crypto sentiment indicator?
A crypto sentiment indicator helps determine how investors feel about the crypto market and how that affects price movements. These indicators help you quantify optimistic or pessimistic views of people over a crypto asset.