Psychological analysis in trading is one of the essential weapons for investors. However, there are many misconceptions about psychological analysis in the cryptocurrency market. The majority of people have a misunderstanding about market sentiment (Sentiment). The crowd thinks that when sentiment is high – euphoric, it’s time to buy, and when it’s low, it’s time to sell. Meanwhile, some people are strongly against the crowd mentality, which is why they become lone traders and often more successful than others.
BUT – the crowd isn’t always wrong. Only when the crowd reaches an extreme level do you see their mistake. Cryptocurrency market sentiment analysis is not the primary method for analyzing this asset. However, it is a very useful and prominent supplemental tool. Like any other tool, it’s important that it is applied correctly – while in reality, many are applying it incorrectly.
So, if you want to learn more about Sentiment Analysis – How to analyze cryptocurrency sentiment, the following article will help you.
Contents
Sentiment Analysis – What is it?
Whether you are trading stocks, forex, or cryptocurrencies, whether you use fundamental analysis or technical analysis, you will always be “haunted” by the question: “How do you feel about the market” – “Do you think it will rise or fall in the coming time”? This is a small example showing an investor’s psychology towards the market.
Looking broadly, market psychology represents the mood and general feeling of traders.
Therefore, market sentiment analysis (Sentiment Analysis) is the process of analyzing emotions, capturing the attitude of the market, helping you assess whether the investor crowd is feeling optimistic or pessimistic about the market, from there predicting the direction of price movement in the future and making sound investment decisions.
Cryptocurrency Sentiment Analysis – Is it really effective?
We humans have emotions and we are programmed to react to them in certain ways. If we are scared and feel that we may be in danger, your brain will tell you to run and hide. Conversely, if we feel happy doing something, we will definitely do it again. Moreover, if we are jealous, then the similar action that made us jealous is on our to-do list.
“When everyone thinks alike, everyone is likely to be wrong.”
“The public is usually right about trends, but wrong at both ends”
“A ‘crowd’ thinks with its heart (meaning it is influenced by emotion) while an individual thinks with their mind.” -Humphrey B. Neill –
And have you often heard the saying “Don’t follow the crowd“?
For example, people buy into certain assets, whether cryptocurrencies or stocks, hoping to become wealthy. We believe this because others have made a lot of money by doing so. We are also jealous of someone who bought Shiba Inu worth $8,000, and a year later that portfolio became $5 billion. We act because we are confident we have bought a promising asset. BUT – when the price starts to fall, that confidence starts to blow away and is replaced by panic and fear. The brain will stimulate us to sell it and leave the market.
Then, we decide to sell. And then realize – We just BOUGHT HIGH – SOLD LOW. Isn’t that great?
So, if based on cryptocurrency sentiment analysis, we can know what the crowd is thinking, at what level, and can avoid acting like them. Even better, you can turn it into an opportunity.
A famous analyst on Hackernoon shared: “Technical analysis is my main method for trading cryptocurrencies. However, during the down market period, I spent a significant amount of time studying market sentiment. And I realized that sentiment analysis is the tool that allowed me to buy Bitcoin at a “bottom” price that many people admire. Therefore, I am a big fan of sentiment analysis“
Tools to Help Analyze Cryptocurrency Sentiment
There are many ways to take advantage of cryptocurrency sentiment analysis, for both long-term and short-term investors. We all know that cryptocurrencies have extremely strong cycles that can yield huge profits if you find ways to buy at the bottom and sell at the top. But where is the top, where is the bottom? We need to refer to some tools.
The following cryptocurrency sentiment analysis tools are the most popular tools, which you can use for free. However, keep in mind that they are not the north star for any investment decision. Because sentiment analysis MUST always be accompanied by technical analysis, fundamental analysis.
Greed & Fear Index
First, there is an index that many people are familiar with, the “Greed & Fear Index“.
How to look up:
- You can search for “Crypto Fear & Greed Index” in a search engine, and you will find many websites that provide it.
- I often use this website: https://alternative.me/crypto/fear-and-greed-index/
Meaning: Cryptocurrency market behavior is very emotional. People tend to be greedy when the market is rising, leading to FOMO (Fear Of Missing Out). Moreover, people often sell their assets in an irrational reaction when they see red numbers. With the Fear and Greed Index, it helps you avoid your own emotional overreactions. There are two simple assumptions:
- Extreme fear can be a sign that investors are overly worried. This might be an opportunity to buy.
- When investors become overly greedy, it means the market is due for an adjustment.
BUT – remember that this indicator is not perfect. If you pay attention to the many Bitcoin price cycles in the past, you might notice it only seems useful at market bottoms. The irrational euphoria at the top can last a very long time. For example, during the period when Bitcoin rose from $5,500 to $20,000 in a month, investors saw the Fear & Greed indicator constantly stay at “extreme euphoria” for a long consecutive time – as new money continuously poured into the market nonstop. Conversely, extreme sentiment at the bottom often does not last too long (Because usually, by then, there is no one left to buy or sell, as everyone has already bought or sold).
Google Trends for Cryptocurrency
Google Trends is a quite useful Sentiment Analysis tool. It shows you the search traffic for a particular type of keyword, such as “Bitcoin, Crypto”… The way you can use it is to assess when traffic starts peaking. This is because when search volume increases, it often means that small investors are rushing in due to FOMO. Perhaps they’ve heard friends bragging about the money they made from Bitcoin and other cryptocurrencies, which will make them buy at any price, just wanting to make money.
Access: https://trends.google.com/trends/explore?q=Bitcoin
This is a popular sentiment analysis indicator that many bloggers and YouTubers use. However, many don’t know how to fully utilize it, and sometimes rely too much on it. The best way is to always know how to change the settings, keywords, and not to just use a single default “keyword.” Look at different keywords, not just Bitcoin, and apply perspectives with multiple time frames. Especially, pay attention to the “inflection points” of the market (from increasing to decreasing, or from decreasing to increasing). From there, you can somewhat know what the market is focusing its attention on and to what extent.
Bitcoin Misery Index (BMI)
The Bitcoin Misery Index (BMI) by FundStrat, created by Wall Street strategist and co-founder of Fundstrat Global Advisors Thomas Lee, is to let investors know how “miserable” Bitcoin (BTC) holders are based on the current price.
Access: https://fsinsight.com/bitcoin-misery-index-bmi/
The FundStrat’s Bitcoin Misery Index (BMI) represents investors’ sentiment about the “price action” of bitcoin, measuring the expectation psychology of bitcoin holders (50 =Neutral, <27 Miserable, >67 Happy). Bitcoin BMI ranges from 0-100 and indicates buying and selling opportunities for Bitcoin investors.
- When the BMI index falls below 27, it shows a strong Buy signal.
- The higher this index, the higher the likelihood of a Bitcoin price drop.
Overall, compared to Bitcoin price fluctuations in the past, it can be seen that Bitcoin BMI often coincides with beautiful buying points in the market (although not always perfect).
Bitcoin Bull & Bear Index
This is also a common method I often use to analyze cryptocurrency market sentiment. It shows the frequency of conversations about Bitcoin (BTC) price increases/decreases on social media. Data is collected from Twitter, Reddit, and Bitcointalk and updated hourly. 0 indicates extreme bearishness, 1 extreme bullishness.
You can view this indicator at:
Access: https://www.augmento.ai/bitcoin-sentiment/
If you look at the chart above, you might also notice that it is not perfect in any way. However, with all forms of cryptocurrency sentiment analysis, it should always be combined with other tools. But we cannot deny that the Bitcoin sentiment – Bull & Bear Index has indicated certain price fluctuations and, upon closer examination, you can see that sentiment often turns negative before the price starts to decline. This can be explained by some people starting to mention negative issues on social media, triggering a wave of fear and panic selling.
LunarCrush Tool
The above cryptocurrency sentiment analysis tools are quite simple and usually focused on Bitcoin. LunarCrush is a comprehensive platform for sentiment analysis dedicated to many altcoins, up to over 2000 altcoins. LunarCrush works by analyzing social media activities to then provide custom scores, Galaxy Score, and AltRank.
Access: https://lunarcrush.com/
AltRank measures the following four aspects:
- Market Volume – based on reputable exchanges
- Social Volume – the volume from unique websites
- Percentage Change Compared to Bitcoin – whether it outperforms Bitcoin
- Social Points – the total social volume.
Based on these four criteria, a cryptocurrency is ranked where 1 is the best. The way you can use this data is to look at coins with increasing ranks. Choosing only number 1 is not the best option because recent price action plays a very large role, which means if a cryptocurrency surges suddenly in a short time, it can quickly push up the AltRank, but that does not mean it is sustainable.
Galaxy Score is also derived from four different measures:
- Price Score – calculated from moving averages.
- Social Score – based on social updates increasing and decreasing.
- Social Impact – based on social volume/interaction/impact.
- Correlation Ranking – an algorithm that determines how correlated the price is with social sentiment.
Although the Galaxy Score also includes price action, it is less affected by it as it is calculated using moving averages. Thus, Galaxy Score measures social sentiment better, which is why it is worth monitoring. Galaxy Score values range from 0 to 100, with 100 being the best.
When using LunarCrush, I focus on Galaxy Score because I think it offers better opportunities to find good altcoins before they “fly to the moon.” In addition, not only AltRank and Galaxy Score, LunarCrush also provides much more, such as social media engagement levels, social media posts, influencer tracking, etc.
Using Longs/Shorts Data
Did you know that the LONGs and SHORTs contract data of any cryptocurrency asset can also become a useful tool for you to analyze sentiment? There are many websites that provide this data, but I usually choose:
Why do I categorize it as sentiment analysis? Because this data will tell you what investors are expecting about the asset’s price, whether they are more optimistic or pessimistic.
So how to apply it? This tip is often used by professional traders. Typically, they look for times when the difference between LONG and SHORT is significant, with one side being at least < 50%. After that:
=> You should look to LONG when most traders are SHORT, and SHORT when most other traders are LONG.
But the important thing is not to LONG/SHORT indiscriminately, but you need to find a reasonable time to enter the market. For example, when you see a big difference in LONG/SHORT ratio, you can look to buy in the Support area and look for price reversal signals like a Pinbar candle, an Engulfing pattern, etc.
In summary:
All of us are influenced by emotions, and that’s natural. It’s also necessary to keep the market going. Yes, sometimes emotions cause extreme market movements that seem scary. However, it’s important to look at the bigger picture, both when prices rise and especially when they fall.
You need to analyze whether the price movements are really reasonable or just some FOMO or FUD.
“When you see a significant decline, you don’t need to think it’s the end of the world. Look at the long-term sentiment surrounding the project or market, what has happened? Is it a short-term drop, after which the market will continue to rise? Or has it really reached its peak? Just find the answer and then make the right decision about whether it’s an overreaction of the majority, and turn it into a buying opportunity.
The opposite is also true. When you see a major pump based on some positive news, take some time to analyze what has really happened and see whether it really starts a larger trend change or if it’s just people not knowing what they’re doing and buying out of FOMO. Don’t become someone who buys at the peak and sells at the bottom.”
Overall, cryptocurrency sentiment analysis is a quite USEFUL and IMPORTANT tool, and very accessible. In my opinion, you should spend time learning and understanding how to use it. That way, you can eliminate some of the emotional influence and gradually take control of the market. I wish you success.
