How to Use Sentiment Analysis to Gain Insights into the Trends and Opportunities in the Cryptocurrency World

Market sentiment is an assessment of traders’ attitudes and emotions, which can affect their investment decisions, especially in highly volatile cryptocurrency markets where market sentiment can experience short-term intense fluctuations. The ups and downs of market sentiment often signify new opportunities or new pressures and risks. If you are not familiar with sentiment analysis in cryptocurrencies, then this article is suitable for you.

This article will introduce you to sentiment analysis methods and classic sentiment analysis indicators in the world of cryptocurrencies, as well as share several related practical tools that will allow you to scientifically understand market sentiment in cryptocurrencies and accurately grasp token price fluctuations.

What is sentiment analysis?

In the financial environment, the term “sentiment” refers to views and feedback on market conditions. Cryptocurrency market sentiment describes the reaction and attitude of investors towards macro market prices, and also reflects the psychology of the population participating in cryptocurrency trading and development.

In everyday language, sentiment analysis is the process of detecting positive or negative emotions in text. It was initially used to detect emotions in social data, measure brand reputation, and understand customers by assigning scores to a piece of text based on corresponding emotions. For example, the phrase “can’t wait” corresponds to a score of +0.5, while “run away” corresponds to a score of -0.4. It assigns a score to each word based on its level of negativity or positivity, and then adds up all the scores to see the overall sentiment of a sentence. Typically, this score ranges from -1 to +1. -1 represents a very negative sentiment, while +1 represents a very positive sentiment.

This analysis method can actually be widely applied in the world of cryptocurrencies. Cryptocurrency sentiment data comes from text information on social media platforms such as Twitter, Discord, Telegram, etc. A sentiment analysis tool can aggregate real-time dynamic information from major platforms and protocol communities, analyze and summarize the current market sentiment based on a scoring system and corresponding weights, and provide auxiliary guidance for investors’ market behavior. Otherwise, investors would need to manually and time-consumingly browse different social networks to discover the psychological perception of specific tokens.

Sentiment Analysis in the Cryptocurrency World

Just last month on the 23rd, four researchers from Pennsylvania State University in the United States published a research paper on “Cryptocurrency Sentiment Analysis.” Their research results indicate that social media sentiment can significantly predict cryptocurrency returns, and fundamental events play a role in shaping sentiment. In addition, the study found that market prosperity is positively correlated with momentum returns, but does not predict volatility, which suggests that sentiment affects returns through price perception and demand shocks rather than risk premium channels. Overall, the paper highlights the importance of sentiment in understanding and predicting cryptocurrency market dynamics.

Cryptocurrency Fear and Greed Index

The Cryptocurrency Fear and Greed Index is an analytical tool used to measure market sentiment in the cryptocurrency field, especially in the Bitcoin market. The index ranges from 0 to 100, where values close to 0 indicate extreme fear and values close to 100 indicate extreme greed.

The Cryptocurrency Fear and Greed Index is calculated using six major factors, with each factor being weighted according to its perceived importance. These factors include:

Market Momentum and Volume (25%): The calculation of this index compares the current daily trading volume and momentum with the 30-day and 90-day averages. Larger sales volume and negative daily market trends indicate significant selling pressure, thus increasing panic. In contrast, large buying volume and repeated positive market trends indicate intensified greed.
Volatility (25%): The higher the volatility of a cryptocurrency asset, the more fearful investors may become, resulting in a lower score for this index. Similar to market momentum and volume, volatility and value decline (maximum drawdown) are compared with the 30-day and 90-day averages.
Trends (10%): Higher search volumes usually lead to greater potential greed, thus resulting in a higher index score. However, not all search queries carry the same weight, for example, negative searches such as “Bitcoin market manipulation” and “Bitcoin crash” indicate greater fear in the market.
Market Dominance (10%): Market dominance focuses on the percentage of Bitcoin market capitalization compared to the total cryptocurrency market capitalization. An increase in Bitcoin’s dominance (increased market share) is generally considered a scarier market as investors may perceive Bitcoin as a cryptocurrency “safe haven.” In contrast, this index sees increased investment in altcoins as a greedier market, with more speculators willing to invest in lesser-known assets in hopes of earning substantial returns.
Social Media (15%): This algorithm collects and calculates posts with cryptocurrency-related tags and measures the posting speed and interaction volume of posts related to cryptocurrencies within a specific time period. Higher interaction rates usually reflect more market greed, while lower interaction rates may indicate more fearful market behavior.
Surveys (15%): Surveys can be used to gauge investor sentiment towards cryptocurrencies. Bullish responses may indicate greed, while bearish responses may indicate fear.

This index provides a comprehensive reflection of market sentiment and serves as an emotional indicator and risk management tool, helping investors make informed decisions and avoid excessive emotional reactions. When the market is driven by extreme fear or greed, it often leads to overcorrection. Specifically, investors can utilize it to:

Measure market sentiment: high values indicate that the market may be overbought (extreme greed), while low values indicate that the market may be oversold (extreme fear).
Provide information for investment decisions: high values may mean caution or sell, while low values may mean a good time to buy. However, other market factors should always be considered and due diligence should be conducted.
Risk management: this index can help manage the risk level of investment portfolios, helping to balance between potential high return, high risk investments and safer, low return investments.

Bull/Bear Index

The GMI Bull/Bear Index is an index based on the rate of price change and the status of perpetual contract funding rates. This index has strong identification ability for bull/bear transitions in medium to long cycles (six months to one year) in historical backtesting. It can also provide observation assistance for public trading psychology, market frenzy status, and short-term breakout intentions.

The GMI Index is directly proportional to the rate of BTC price increase and inversely proportional to the size of the perpetual contract funding rate. It is calculated based on the historical price trend changes of Bitcoin and the funding rate of perpetual contracts, that is: GMI = rate of Bitcoin price increase / level of Bitcoin perpetual contract funding rate.

When using the GMI Bull/Bear Index, first of all, it is important to know that when GMI >= 0.4, it is considered a bull market, and when GMI < 0.4, it is considered a bear market. Secondly, we know that GMI has the following four states:

GMI falls, price rises: negative signal, the rate of increase in bullish energy is smaller than the rate of increase in bearish energy, indicating market panic and the existence of space for price correction;
GMI rises, price falls: positive signal, the rate of decrease in bullish energy is smaller than the rate of decrease in bearish energy;
GMI rises together with price: positive signal, the rate of increase in bullish energy is greater than the rate of increase in bearish energy;
GMI falls together with price: negative signal, the rate of decrease in bullish energy is greater than the rate of decrease in bearish energy. Since the launch of the GMI Bull/Bear Index, its accuracy has been very high, successfully helping some users to avoid major falls and bravely increase positions. It can be used together with fear and greed index and other tools to assist in making investment decisions.

Practical Analysis Tools

1. Cryptocurrency Fear & Greed Index Dashboard created by Alternative.me

This website’s Fear & Greed Index is updated daily. It not only quantifies emotions, but also uses visual color gradients to intuitively and quickly show users the current level of market fear and greed, and summarizes index information from yesterday, last week, and last month.

The current cryptocurrency fear and greed index is an excellent benchmark for cryptocurrency traders, investors, and market analysts, as mentioned in the previous section. However, it also has its limitations. For example, it focuses on Bitcoin and may have biased sentiment reactions towards other cryptocurrencies. Its calculation is also not completely transparent. While the calculation weights for major categories are publicly explained, the composition and calculation percentages of subcategories are not disclosed.

Related link: https://alternative.me/crypto/fear-and-greed-index/

2. On-chain and cryptocurrency social media analysis tool Santiment Santiment

Santiment is a comprehensive data analysis tool designed to guide cryptocurrency traders in making the best trading decisions based on real-time data rather than emotions. It predicts potential market cycle tops (the best time to exit the market) or potential market cycle bottoms (the best time to enter the market) by combining token social media activities, movements of funds in and out of idle or important wallets, and many other indicators.

Within the social media analysis page, users can enter keywords they want to search for, such as “buy the dip,” “sell,” “bottom,” etc., and the tool will display data from various social platforms such as Telegram, Reddit, Twitter, etc., and provide a summary of the data based on time dimension.

Santiment has a user-friendly interface and is an easy-to-use platform. It has a large number of data sources, including on-chain data, social media, and financial reports, with data history dating back to 2009. It analyzes over 7 million social mentions daily and provides 731 available indicators and 22 wallet labels, all of which are real-time and up-to-date. However, it comes with higher fees compared to other cryptocurrency analysis platforms.

3. Social media monitoring and analysis tool LunarCrush LunarCrush

LunarCrush uses AI-managed algorithms to collect information and return it to users in an easily understandable way, allowing users to search, track, and actively engage in discussions on trending topics across all social media platforms.

On LunarCrush, over 2000 different cryptocurrencies are listed and categorized based on market sentiment identified from data extracted from various sites considered by the application. Social networks such as Twitter, Reddit forums, YouTube video hosts, and Medium blog platforms are all checked by AI-managed algorithms, providing users with a set of indicators summarizing the sentiment of the cryptocurrency market.

For example:

Social volume: The number of times a cryptocurrency is mentioned within a given time period. If someone uses the word “Bitcoin” on Twitter, the social volume of Bitcoin will increase by 1 during the analyzed period.
Social engagement: The level of community involvement around a cryptocurrency. This metric considers reactions to publications, reviews, and shares to exclude any forms of manipulation and spam.
Social contributors: Similar to collecting the unique mention count for “social volume,” this statistic determines the number of unique individuals discussing a particular corner within a given time period.
Shared links: The number of times URL links related to cryptocurrencies are shared. These can be articles, block explorers, or candlestick charts.

On July 12th, LunarCrush completed a $5 million Series A funding round, led by Draper Round Table and INCE Capital. LunarCrush subsequently released a beta version of its social search tool, which will allow users to search for any topic on the platform, not just financial products. The new tool allows users to search across all social media platforms to extract the most relevant content around their established interests.

The project is accessible without registration and is free. Through diverse and optional indicators, users can gain a more intuitive understanding of the popularity of all current cryptocurrencies, which can be helpful for investment decisions and move away from relying solely on candlestick charts to judge market trends.

4. veDAO: Web 3 Investment Compass

veDAO, as a decentralized investment and financing platform led by DAO, is committed to helping investors capture Alpha accurately and achieve hundredfold returns. It has a TB-level massive project database, covering nearly 70 mainnet ecosystems and 40 web 3 tracks. This includes 22,000+ Twitter KOLs, 3,700+ investment institutions, 20,000+ whale addresses, and 6,000+ related information. veDAO not only has a comprehensive project evaluation system and an expert committee composed of well-known web 3 institutions, but it will also launch two tracking modules in August: Twitter sentiment tracking and smart money signal tracking.

veDAO new version design draft

By leveraging the advantages of a massive database, Twitter sentiment analysis and tracking are conducted to intuitively display the current popularity of projects through intelligent sorting. The analyzed indicators include the number and changes of mentions by KOLs, the number of KOLs who mention it, token price changes, etc. This allows users to quickly and accurately understand the most concentrated areas of Twitter sentiment, grasp the latest token market trends and news, and help adjust investment strategies. It enables faster tracking of Alpha and earlier risk avoidance.

veDAO new version design draft

The upcoming new features of veDAO also use AI interaction and combine with large language models to easily use information through AI. The Twitter sentiment analysis for specific projects/tokens is more refined and diversified in terms of observation dimensions. This includes the number and changes of Twitter followers, the number and changes of discussions, the number and changes of KOLs’ attention, the number and changes of whale attention, and the number and changes of NFT KOL attention. By using data visualization, the frequency and changes are intuitively and quickly displayed, effectively assisting investors in analyzing the sentiment of token communities. It can also be combined with the smart money signal tracking function to adjust investment strategies based on evidence, maximizing the tracking of Alpha projects while minimizing risks.

Conclusion

Cryptocurrency sentiment surrounds us every minute of every day. Only by learning to analyze the fluctuations in sentiment can we seize the opportunities and risks in the market. Finding an efficient analysis tool that suits oneself can also make investors’ analysis more accurate. Currently, there are more and more cryptocurrency data analysis tools. This article selects practical and easy-to-use tool projects for sharing. I hope that readers can flexibly use such analysis tools to help you better predict and judge the market and make optimal investment decisions.

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