Market sentiment analysis assesses the attitude, sentiment, mood, and emotions surrounding a financial asset. It identifies the feelings of other traders about the general or specific cryptocurrency market. Understanding cryptocurrency market sentiment is essential, as it can significantly impact the price of any digital asset.
Our technical analysis guide states that price action should, in theory, reflect all available market information. Unfortunately, this does not happen. This makes market analysis for cryptocurrency traders a complex task to undertake.
The cryptocurrency market reflects a lot of information and speculation – every trader has their own opinion about why the market is behaving the way it is and whether to trade in its direction or against it. Sentiment analysis becomes useful because it helps in assessing the majority opinion that is driving the market.
An important point to note, as a retail trader, is that your personal opinion cannot influence the market. Sentiment analysis helps you spot the big players who control the market and weigh in on their positions in the market.
What is sentiment analysis?
Sentiment analysis takes into account traders’ emotional opinions and attitudes towards a particular cryptocurrency. It examines the psychology of the trading crowd for that particular cryptocurrency as it aligns with their market positions. Cryptocurrency sentiment analysis also conveys the evolution of the cryptocurrency as reflected in social and trading metrics.
Unlike the forex and stock markets, cryptocurrencies are more affected by social pressure and can be affected by a single tweet or roadmap update. Generally, market sentiment analysis involves looking at the attitude of market participants to try to predict price movements. It also helps you understand the overall asset dynamics and the hype or fear surrounding a particular cryptocurrency.
As mentioned above, the cryptocurrency market is social in nature, which means that if more people tend to act on an event, idea, sentiment, or thought, they can greatly influence the price momentum. A prime example of such a scenario is when a single tweet from Elon Musk causes the price of Dogecoin to rise or fall accordingly.
The importance of market sentiment analysis
Many trading strategies rely heavily on analyzing market sentiment. However, it is a good idea to make decisions based on a combination of all available information, just as with technical or fundamental analysis. For example, analyzing market sentiment can help you determine whether your fear of missing out is justified or just a result of herd mentality.
When you combine technical, fundamental and market sentiment analysis, you can:
*Improve your understanding of short and medium term price action.
*Improve your control over your emotions.
*Identify potential profitable opportunities.
How to Conduct Cryptocurrency Market Sentiment Analysis
Understanding market sentiment begins with gathering market views, ideas, and opinions. Again, while market sentiment analysis can be helpful, you should rely on more than that. Instead, you can combine the information gathered with your existing knowledge and experience to come up with actionable conclusions.
Search relevant social media pages and channels to see how the community and investors feel about the project. Connect directly with the project team and community members by joining official forums, Discord servers, or Telegram groups. However, always be careful and refrain from basing your opinion on a single metric.
Using social media is just the first step. There are many ways to get a broad picture of market sentiment. In addition to monitoring social channels (especially Twitter, which is popular among crypto enthusiasts), you should consider the following:
- Use data collection software tools to track social signals.
- Keep up with the latest industry news by visiting media portals and blogs.
- Set up alerts or monitor large transactions made by whales. Some crypto investors monitor these movements regularly, and they can affect market sentiment. Free whale alert bots can be found on Telegram and Twitter.
- Use CoinMarketCap to look at market sentiment indicators and pricing signals. These indicators examine different data sources and briefly summarize current market sentiment.
- Use Google Trends to gauge the level of interest in a cryptocurrency. For example, high search volume for “how to sell cryptocurrency” may indicate negative market sentiment.
Here are some popular ways to conduct cryptocurrency market sentiment analysis.
*Financing rates
*Momentum Index
*Social media
*Community Analysis
*Whale watching
Cryptocurrency Funding Rates
Financing rates are periodic payments made to long or short traders based on the difference between perpetual market and spot market prices. Traders will pay or receive financing based on their open positions.
It is a trackable cryptocurrency measure that is linked to market sentiment, and reflects periodic payments made to traders based on price differences. Cryptocurrency funding rates prevent long-term price divergence in both markets and are recalculated multiple times throughout the day.
The rule is clear:
Market sentiment is bullish whenever the funding rate is positive. Likewise, whenever the funding rate is low, market sentiment is bearish.
Cryptocurrency Sentiment Indicator
Sentiment indicator represents how a group perceives a market or economy. These market psychology-based indicators measure sentiment numerically or graphically to predict how current beliefs and attitudes will influence future market behavior.
Sentiment indicators such as the Fear and Greed Index examine how bullish or bearish market participants are and what they are thinking and feeling to predict future investor behavior. When sentiment readings are abnormally high or low, you may start to act in the opposite way.
The sentiment index attempts to predict whether investors are fearful or greedy. It can be influenced by volatility, market momentum, investor responses to surveys, Google trends, demand for junk bonds, and other factors. A fearful market indicates a great time to buy if you know how to pick the right asset, while a greedy market indicates a good time to sell.
Social Media and Community Analysis
While conducting cryptocurrency market sentiment analysis, evaluating the social media and communities related to the specific cryptocurrency, such as Reddit, Twitter, Discord Channels, and Telegram, is crucial. Many followers can greatly influence price fluctuations if they participate in social communities.
When analyzing social media and communities, you should look for hype or fear associated with a particular cryptocurrency. You should assess how investors and community traders feel about current developments on social media and act accordingly. Hype attracts more market participants and indicates bullish sentiments and vice versa.
whale watching
Who is a crypto whale? This refers to an investor who holds and executes multiple crypto transactions across different blockchains. At the same time, whales are monitored by tracking and setting alerts for large crypto transactions on any blockchain.
*Monitoring the big players in the ecosystem also helps in understanding the crypto market sentiment.
*Retail activity has declined as the bull market slows, but the number of large holders, or “crypto whales,” has increased. While whales are largely classified based on arbitrary metrics, holders of more than 1,000 Bitcoin are often considered to be such. As a result, whale trades naturally impact the price of Bitcoin, but this effect is more pronounced across altcoins due to their smaller market caps.
*People have been piling up Bitcoin and other digital assets, suggesting that the number of whales is likely to grow. Given their ability to influence prices, it is important to understand how they position their trades.
What exactly are crypto whales?
Crypto whales own a large number of specific cryptocurrencies. As mentioned earlier, there is no “official” threshold for what constitutes a whale, but in the case of Bitcoin, 1,000 BTC is the most commonly used number. The number is usually higher for altcoins due to their relatively small market cap.
What to watch out for:
Whales increase balance, fewer whales = concentration of supply in older whales' purses (duration varies)
- Whales improve balance, more whales = upside.
- Whales deplete the balance; fewer whales = bearish.
Bitcoin whale
Bitcoin whale is a cryptocurrency term for individuals or entities who own large amounts of Bitcoin; whales own enough of the cryptocurrency to manipulate the currency's valuations.
Key points about cryptocurrency whales
*The three most significant Bitcoin whales represent 3.07 percent of the total Bitcoin in circulation and are valued at approximately $27.8 billion in September 2021.
*Bitcoin whales are similar to other major asset holders in that their actions disproportionately impact the Bitcoin market by increasing volatility, decreasing liquidity, or a combination of the two.
* Satoshi Nakamoto, the creator of Bitcoin, the Winklevoss twins, Michael Saylor, and venture capitalists like Tim Draper and Barry Silbert are among the most prominent Bitcoin whales.
Can we rely on cryptocurrency market sentiment?
Cryptocurrency market sentiment can help predict the future momentum of a cryptocurrency. Investors who understand cryptocurrency market sentiment can make better trading or investment decisions. However, accurately gauging the nature of public opinions, attitudes, moods, and expectations is easy. On the other hand, combining cryptocurrency sentiment analysis with technical and fundamental analysis can provide a complete picture.
With more practice, crypto sentiment analysis can lead to a higher winning percentage. It may not work sometimes, but using it every time you make a cryptocurrency prediction can help you make a profit. It also helps reduce your risk to some extent.
Reference links:
https://www.binance.com/en/price