Analysis of Cryptocurrency Market Sentiment as a Trading Tool

Sentiment analysis is understood as research of investors’ attitudes to an asset. This technique is used in the cryptocurrency and other markets and allows you to more accurately predict the dynamics of coins.

Анализ настроений криптовалютного рынка

What is the market mood

The price of cryptocurrencies, like other goods, is determined by the levels of supply and demand. They are influenced by many factors, including public opinion, the media, discussion on social networks.

So, Elon Musk’s tweet about dogcoin led to increased demand for the coin and an increase in its price by 4000% (as traders say, “sent a coin to the moon”).

Что такое настроение рынка

Quantitatively, market sentiment is measured using various indices. They give the investor information that is better used in combination with such traditional and well-developed methods as technical and fundamental analysis.

The importance of analyzing market sentiment

When analyzing any markets, there is a so-called bull market (which corresponds to the growth trend) and a bear market (corresponds to the downward trend). The cryptocurrency market is characterized by fluctuations between bullish and bearish markets and frequent trend changes. This is the volatility (variability) of the cryptocurrency market.

The analysis of market sentiment helps investors to assess the available information more objectively and to predict the trend in the short and medium term with greater probability.

Важность анализа рыночных настроений

So, sentiment analysis can help to understand whether FOMO (Fear of Missing out – fear of loss) is justified. This is what the fear of losing lost profits is called. FOMO syndrome is especially common when an asset begins to grow rapidly in price in a short time. The fear of missing out on profits forces investors to buy it at a greatly inflated cost. Analysis of market sentiment can help overcome emotions and make decisions more carefully.

How to analyze market sentiment

First of all, it is recommended to study publications on the crypt in the media and social networks. Of the social networks, Twitter is currently the most popular among crypto investors. Many traders and cryptocurrency experts publish their conclusions on social networks from the analysis of the current situation in the crypto market.

Relevant information can be found in blogs about cryptocurrencies. But you need to keep in mind that this topic attracts a lot of scammers. In particular, shilling is common – advertising coins by their owners in order to increase their potential profit. Also, coin holders can create multiple accounts to further boost the popularity of the coin (the so-called “Sybil attacks”). Such attacks are especially common on Facebook and Twitter.

It follows from this that important information may turn out to be misinformation and any forecasts should be treated critically.

You can track the behavior of large traders (they are also called whales) in the cryptocurrency market.

To analyze market sentiment, it is not necessary to collect and study statistics manually. It is convenient to use special programs, including bots (robots) – special programs for the Internet that automatically perform specified actions according to a schedule or specified criteria.

Specialized services, such as CoinMarketCap and Google Trends, can help in analyzing market sentiment.

Indicators for analyzing market sentiment

Let’s look at several popular indices that are used in the cryptocurrency markets.

Fear and Greed Index

This index takes a value in the range from 0 to 100. Its lower values indicate the concern of market participants, and high values indicate their confidence.

With a low index value, you can buy coins cheaply and win when the trend changes. With a high value, coins can be sold profitably.

Индекс страха и жадности

Bulls and Bears Index

The index reflects opinions on social networks regarding market behavior. It varies from 0 to 1. The closer the value is to zero, the more investors’ behavior corresponds to the bear market sentiment. Proximity to unity demonstrates the sentiment of a bullish trend.

Bitcoin Sentiment Index

Another indicator of social media sentiment. The indicator value is calculated using artificial intelligence-based programs that analyze bitcoin mentions.

If you observe the index curve, it is recommended to buy bitcoin when the chart is growing, and sell when it is falling.

Conclusions on the topic

Sentiment analysis has long been used to make stock market forecasts. But this technique can also be applied in the cryptocurrency market.

In any case, it is useful for an investor, especially a beginner, to track information on social networks about forecasts of trends in the cryptocurrency market. But you need to treat it carefully, because, as practice shows, the real behavior of the crypt does not always follow any forecasts, including data from technical and fundamental analysis.

In order for the decision to buy or sell a crypt to be more balanced, you need to take into account the whole set of factors, including your knowledge and experience.

It should also be borne in mind that everything related to cryptocurrency attracts a large number of scammers. This is facilitated by the uncertain legal status of scripts in most countries of the world. Therefore, it is easy for crooks to avoid not only criminal, but even administrative punishment.

Published: 28 January, 2022

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