The feelings of investors and traders are the primary influences on the cryptocurrency markets.
The cryptocurrency market is different from traditional financial markets where the base of investment decisions is comprised of earnings reports, changes in interest rates, etc.
Instead, this market is even more sensitive to public sentiment, social media buzz, and news stories. Below, I discuss some importance of sentiment analysis in cryptocurrency trading and how a trader uses it to make an informed decision.
Sentiment analysis simply means studying what people are thinking, feeling, and saying. It gauges their opinions, emotions, and attitudes through the myriad channels of social media news and forums.
For a cryptocurrency trader, one can feel the pulse of the market-optimistically, therefore, bullish, or pessimistically, therefore, bearish in its ends.
These analyses usually take place by making use of the natural language processing tools in scanning accounts on Twitter, Reddit, and Telegram for keywords and emotions tied to certain cryptocurrencies.
For example, if posts and comments pertaining to Bitcoin start going positive all over the social media front, the sentiment analysis will classify the market as bullish.
Conversely, negative posts and comments about Bitcoin may be indicative that the market's sentiment looks bearish and there are sell-offs in place.
Cryptocurrency prices often readily respond to views and emotions within the broader market.
Because retail investors drive crypto markets, their activities are influenced positively and negatively by what they see, hear, or read both on social media and in the news.
For cryptos, since they do not have a long history of financial reports or established fundamentals, these sentiments thus have a more significant impact on prices.
Overwhelmingly positive sentiment becomes a buying spree, catapulting the prices upwards.
Fear, uncertainty, and doubt, translated into FUD, means selling en-masse because bad news tends to be highly contagious.
A recent past example would be when Elon Musk posted about Bitcoin. Such was the immediate effect on Bitcoin's price.
Traders, now ones that have been so far enabled with this sentiment analysis, should know it better so that they can prepare themselves for these trends well in advance.
Sentiment analysis is most beneficial for short-term traders looking to maximize gains on rapid price movements. Here's how traders generally implement sentiment analysis in their trading strategy:
Spotting Trends Early
In addition, when sentiment tools start tracking an increasing number of positives about a certain cryptocurrency, traders may want to jump in early and ride the wave together with a price surge. Conversely, when negative sentiment gets through the roof, the same traders may resolve to sell before prices fall.
Risk Management
Maintaining attention on sentiment will allow traders to reduce the risk where they are able to avoid markets on the brink of a sharp downturn. For instance, if FUD is spreading fast against a particular cryptocurrency, a trader will have his position ready for closing so as to limit possible losses.
Timing Entries and Exits
A number of the traders use such sentiment analysis to time when to enter or exit in the market. When the peaks of the sentiment tools are seen on the bullish side, it is the best time to sell before the correction sets in. On the other hand, at a time when the sentiment has hit at its lower level and fear hits at its maximum, this would be a buy signal.
Sentiment analysis would help cryptocurrency traders gauge the mood of the market and predict price movements ahead.
When the crypto market is usually highly responsive, by having such sentiment indicators, traders would time their trades better and also be able to reduce risk beyond picking spots for emerging trends.
Since emotions and speculation often dominate the market, understanding sentiment for those traders could prove a great leverage.
May the winds of fortune
carry you to greatness!