Move aside TA & FA, Here comes the Sentiment Analysis
As many of you might already know, there are many factors affecting the Bitcoin and cryptocurrencies’ prices resulting in price going up or down. Arguably the most popular methods being use among the traders and investors worldwide are probably the Fundamental Analysis (FA) and Technical Analysis (TA). FA is normally consisted of the development of underlying technologies, regulatory clarity, real world usage & adoption, or the developer teams themselves. While TA is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.
Aside from those two popular methods aforementioned, there is another type of analysis you are probably missing. Market Sentiment is considered by many as one of the major factors affecting the price of the market. Analyzing the market’s sentiment or Sentiment Analysis (SA) is highly useful and can be a very good reflection of the current market’s mood and tone, especially in a young and volatile market such as crypto.
“Do not trade base on your emotion” is often one of the very first lessons investor and trader, alike, have learnt from the market. To let yourselves get taken over by greed or fear (commonly known as FOMO and FUD in the Crypto’s space) will almost certainly result in loss of fund (aka Rekt). Nevertheless, not that emotions are all bad. If you learn to analyze and utilize the market’s sentiment and use them to your advantage it would show to be relatively beneficial. As the world renowned investor Warren Buffet once said “Be fearful when others are greedy and be greedy when others are fearful.”
Image Source: trade.education
Get to Know Fear & Greed Index
Fear & greed index measures and visualizes the current Bitcoin market sentiment. Since the Bitcoin market is highly emotional, traders often consumed by greed when price starting to sky rocket and lead to a resultant FOMO (Fear of Missing Out). On the contrary, when the market turns read, many will panic sell and become irrational. The Fear & Greed Index was made to save you from your own overacting emotions. There are two assumptions:
- Extreme Fear indicates that investors are too worried. This could be a buying opportunity.
- Extreme Greed indicates that investors are getting too greedy. This could be consider as a signal for price correction.
The index range from 0 to 100. Zero means Extreme Fear while 100 means Extreme Greed. There are multiple data sources used to factor in the current market sentiment, namely, 1. Volatility 2. Market momentum/volume 3. Social Media 4. Surveys 5. Bitcoin’s dominance and 6. Google trends.
Traders Emotion Outweighs TA
Many of the experts agree that Social Sentiment from social media has proven to affect the price movements more than its technical counterpart. It is also considered to be one of the most reliable indicator when it comes to price prediction. Stevens Institute of Technology, Dickinson College, Ivey Business School, and University of Cincinnati have collaborated and studied more than 3.3 million tweets and 344,000 Bitcoin’s related posts on social media during the past 2 years.
Sergey Krutolevich, RoninAI Research Scientist, Ph.D. in Applied Statistic, has stated
“Spikes in conversation volume often precede spikes in search volume by one full day, and new price highs by one to three days. Indicating beyond just a clear correlation between social sentiment and crypto market prices, the former is in fact directly affecting the latter.”
Another study from Pulsar, an Audience Intelligence and Social Listening Platform, has reported
“In nearly every case, a rise of 10% or more in social cryptocurrency buzz volume from one day to the next forecasts a rise of at least 5% in the price of Bitcoin within three days’ time.”
It might not be as surprising to learn the fact that people sentiment can affect the market, but the new study shows that the “Silent Majority” or those who do not post often, are much more powerful than the “Vocal Minority” or those who regularly post about Bitcoin and Crypto. Feng Mai, Assistant Professor of the Stevens Institute of Technology, has added
“Periods of increasingly positive social media commentary do in fact influence the rising price of Bitcoin significantly. By following the infrequent posters’ comments, you get a much more accurate prediction of Bitcoin’s price over time, and this is useful for investors and potential investors to know.”
Ultimately, this is not to suggest the sole use of only one indicator can determine and accurately predict the whole market. As the Bitcoin and Cryptocurrency market is still immature and highly volatile, there are various factors that can affect the price. To combine and utilize multiple types of analysis and to do your own research on the project you are looking to invest in is the only way to outperform and earn from this emerging market.
You may want to read: Instruments to Invest in Digital Currencies