Sentiment Analysis in Crypto Trading: A Beginners' Guide

Sentiment Analysis in Crypto Trading: A Beginners' Guide

Unlock the power of sentiment analysis in crypto trading with our beginner-friendly guide, boosting your market insights and trading strategy.

Market sentiment analysis evaluates the attitude, feelings, moods, and emotions surrounding a financial asset. It determines other traders' feelings about the general or specific cryptocurrency market. Understanding crypto market sentiment is essential, as it can significantly impact the price of any digital asset. 


Our technical analysis guide mentioned that price action should, in theory, reflect all available market information. Unfortunately, it doesn't. This makes market analysis for crypto traders a complicated task to perform.


The crypto market reflects a lot of information and speculation — each trader with their opinion on why the market behaves the way it does and whether to trade in its direction or against it. Sentiment analysis becomes useful as it helps weigh the majority opinion that drives the market.


One important point to note is, as a retail trader, your personal opinion cannot influence the market. Sentiment analysis helps you discover the big boys controlling the market and weigh in on their market positions.


What Is Sentiment Analysis?

Sentiment analysis considers traders' emotional opinions and attitudes towards a specific cryptocurrency. It examines the psychology of the crowd trading that specific cryptocurrency as it aligns with their market positions. Crypto sentiment analysis also conveys the development of a cryptocurrency as reflected by the social and trading metrics. 


Unlike the Forex and stock market, cryptocurrency is more influenced by social pressure and can be affected by a single tweet or a road map update. In general, market sentiment analysis requires research on the attitude of market participants to try to predict price movements. It also helps you understand the asset's overall dynamics and the hype or fear surrounding the specific cryptocurrency.


As mentioned above, the crypto market has a social nature, which means if more people tend to act on an event, thought, feeling, or idea, they can significantly impact the price momentum. A prime example of such a scenario is when a single tweet from Elon Musk causes Dogecoin's price to surge or drop accordingly.


The Significance of Market Sentiment Analysis

Many trading strategies rely heavily on market sentiment analysis. However, making decisions based on a combination of all available information is a good idea, just like with technical or fundamental analysis. For example, market sentiment analysis can assist you in determining whether FOMO is justified or merely a result of herd mentality. 


When you combine technical and fundamental analysis with market sentiment analysis, you can:


- Improve your understanding of short and medium-term price action.

- Improve your control over your emotions.

- Find out about potentially profitable opportunities.


How to Perform Crypto Market Sentiment Analysis

Understanding market sentiment starts with collecting market views, ideas, and opinions. Again, while market sentiment analysis can be helpful, you should rely on more than just it. Instead, you can combine the information gathered with your existing knowledge and experience to find actionable conclusions.


Look into relevant social media pages and channels to see how the community and investors feel about that project. Communicate directly with the project's team and community members by joining official forums, Discord servers, or Telegram groups. However, always exercise caution and refrain from basing your opinion on one metric.  


The use of social media is only the first step. There are numerous methods for obtaining a broad picture of market sentiment. In addition to monitoring social channels (particularly Twitter, which is popular among cryptocurrency enthusiasts), you should consider the following:


- Use data collection software tools to track social mentions.

- Keep up with the latest industry news by visiting media portals and blogs.

- Set up alerts or monitor large transactions made by whales. Some cryptocurrency investors monitor these movements regularly, and they can impact 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 indices examine various data sources and concisely summarize current market sentiment.

- Use Google Trends to gauge the level of interest in a cryptocurrency. For instance, a high search volume for "How to sell crypto" may indicate negative market sentiment.


The following are some well-known methods for performing crypto market sentiment analysis.


- Funding Rates

- Sentiment Index

- Social Media 

- Community Analytics

- Whale Monitoring


Cryptocurrency Funding Rates

Funding rates are periodic payments made to long or short traders based on the difference between perpetual contract markets and spot prices. Traders will either pay or receive funding based on open positions.


It is a cryptocurrency metric that can be tracked and correlates with market sentiment, reflecting the periodic payments made to traders based on price differences. Crypto funding rates prevent long-term price divergence in both markets and is recalculated several times throughout the day.


The rule is straightforward: the market sentiment is bullish whenever the funding rate is positive. Similarly, whenever the funding rate falls, market sentiment falls.


Cryptocurrency Sentiment Index

The sentiment indicator represents how a group perceives the market or economy. These market psychology-based indicators quantify sentiment numerically or graphically to forecast how current beliefs and positions may affect future market behavior.


Sentiment indicators like the fear and greed index examine how bullish or bearish market participants are and what they think and feel to forecast investors' future behavior. When sentiment readings are abnormally high or low, they may begin to act in a contrarian manner.


Crypto Fear and Greed Index: Source:


A sentiment index attempts to predict whether investors will be fearful or greedy. It can be influenced by volatility, market momentum, investor responses to surveys, Google Trends, junk bond demand, and other factors. A fearful market indicates an excellent time to buy if you know how to choose the right asset, whereas a greedy market demonstrates a good time to sell.


Social Media & Communities Analysis

While conducting crypto market sentiment analysis, evaluating social media and communities related to the specific cryptocurrency, such as Reddit, Twitter, Discord Channels, and Telegram, is critical. Many followers can significantly impact price fluctuations if they participate in social communities.


When performing a social media and community analysis, you must look for hype or fear associated with a specific cryptocurrency. You must assess how community investors and traders on social media feel about current developments and act accordingly. A hype attracts more market participants and indicates a bullish sentiment and vice versa.


Whale Monitoring

Who is a crypto whale? This refers to an investor holding and carrying out many crypto transactions across various blockchains. At the same time, whale monitoring is done by tracking and setting alerts for large crypto transactions on any blockchain. 


Keeping an eye on big players in the ecosystem also helps understand the crypto market sentiment.


Retail activity decreases as the bull market cools, but large holders, or "crypto whales," have increased. While the classification of whales is based mainly on arbitrary measures, holders of more than 1,000 BTC are frequently regarded as such. As a result, whales' trades naturally impact BTC's price, but this effect is more pronounced across altcoins due to their smaller market capitalizations.


People have been amassing BTC and other digital assets, indicating that the number of whales will likely increase. Given their ability to influence prices, it is critical to understand how their trades can be identified. 


What Exactly Are Crypto Whales?

Crypto whales own a large number of specific cryptocurrencies. As previously stated, there is no "official" threshold for being considered a whale, but in the case of Bitcoin, 1,000 Bitcoin is the most commonly used figure. The number is usually higher for altcoins because of their relatively small market capitalizations. 


What to Look Out For:

Whales increase balance, fewer whales = Supply concentrating in the wallets of older whales (the duration varies)


- Whales improve balance, and more whales = bullish.

- Whales deplete the balance; fewer whales = bearish.


Bitcoin Whale

A Bitcoin whale is a cryptocurrency term for individuals or entities who own large amounts of Bitcoin; whales have enough cryptocurrency to manipulate currency valuations.


Key Takeaways About Crypto Whales 

- The three most significant Bitcoin holdings account for 3.07 percent of all BTC in circulation and are estimated to be worth $27.8 billion in September 2021.

- Bitcoin whales are similar to other major asset holders in that their actions disproportionately impact the Bitcoin market through increased volatility, decreased liquidity, or a combination of the two.

- Satoshi Nakamoto, the creator of Bitcoin, the Winklevoss twins, Michael Saylor, and venture capitalists such as Tim Draper and Barry Silbert are among the most prominent Bitcoin whales.


Is Crypto Market Sentiment Reliable?

Crypto market sentiment can help forecast a cryptocurrency's future momentum. Investors who understand the sentiment in the cryptocurrency market can make better trading or investment decisions. However, accurately measuring the nature of public opinions, attitudes, moods, and outlooks is easy. Combining crypto sentiment analysis with technical and fundamental analysis, on the other hand, can provide a complete picture.


With more practice, crypto sentiment analysis can result in a higher profit ratio. It may not work sometimes, but using them every time you predict a cryptocurrency can help you make a profit. It also helps reduce risks to a certain extent.


Closing Thoughts

Crypto market sentiment can be beneficial when predicting a coin's future price fluctuations since the crypto industry is still relatively small and more susceptible to public perceptions. The above methods can help you better understand the crypto market sentiment and make improved investment decisions. Having more information is always a good thing. It only increases the likelihood of developing successful trading strategies.


Since the cryptocurrency market is heavily based on supply and demand, investor psychology has a more significant influence. Therefore, investors must monitor social media channels and emotions related to a specific cryptocurrency, stay current on the project's latest news and upcoming events, and use technical indicators to better understand public interest in any chosen token.