When it comes to crypto price prediction, sentiment analysis is not just important; it’s critical. It offers a unique perspective, beyond technical and fundamental analysis, into the current emotions of investors, traders, and general asset holders. This is because price data can often be misleading. When you don’t consider users’ opinions about a cryptocurrency or a pair of trading assets, you could miss very profitable entry points or lose funds trading a token that suffered massive FUD, for instance.
So, in this article, we will explain sentiment analysis, why it matters, and how to gather reliable data for informed trading decision-making. Hopefully, by the time you’re done reading, you can perform it yourself.
What is Sentiment Analysis in Crypto?
Sentiment analysis refers to gathering real-time data about people’s opinions, reviews, thoughts, and feelings about a cryptocurrency, DeFi asset, or general market. It involves detailed research about what people say about a specific crypto token or coin and interpreting that data into practical, informed trading action.
Sometimes, sentiment analysis isn’t mainly directed towards one token, especially in the bear market. It can often be an evaluation of how users view a certain group of coins or the general crypto market at a particular time to determine how volatile the market is or will be.
The information you get from this analysis can help you generate applicable entry and exit points. Sentiment analysis in crypto trading doesn’t exist to replace technical and fundamental analysis. If anything, it confirms them.
When you use indicators to predict and extrapolate price movements, that is, to forecast how a cryptocurrency’s price will move, sentiment analysis will help you confirm these trends.
Say you’re researching Bitcoin, and your indicator shows that its price is currently overbought territory; listening to tweets can help you determine how long that trend may persist. So, you’d typically search for crypto market sentiment today.
For instance, if tweets and Reddit crypto sentiment analysis suggest that people are still trying to take advantage of the bullish trend, you shouldn’t enter a short position yet. On the other hand, if selling sentiment becomes pronounced, you should consider taking shorting action as soon as possible.
It’s important to note the crypto market’s two primary emotions or sentiments. These are fear and greed, and strong price movements can occur when they run at their extremes. Typically, fear is associated with bearishness, selling sentiment, and falling prices. Conversely, greed usually goes hand in hand with bullishness, buying sentiment, and upward price trends.
Sentiment analysis in crypto trading takes time and a good ear for fishing, even the slightest hints of things like FUD. However, many trading tools come with greed and fear indexes that can remove the burden of manually performing these evaluations.
However, they’re sometimes unreliable, as not all can keep up with real-time market data. Excellent sentiment analysis tools like Crypticorn AI Price Prediction Dashboard stand out. This one, for instance, uses natural language processing to filter tweets and news and translate them into accurate and helpful sentiment data for trading.
Why does sentiment analysis matter?
In crypto trading, sentiment analysis matters for several reasons: price prediction, trend identification, and risk management.
Price Prediction
Sentiment analysis is one of the cornerstones of accurate crypto price prediction.
For instance, expert traders were recently able to predict the bullish bitcoin trend primarily because of positive market sentiment around it. It was so effective that the coin’s price rose to just $5k shy of its all-time high, $69,000, in under a few hours.
When evaluating market opinion, remember that positive sentiment often leads to buying pressure and upward price trends, while negative sentiment can result in selling pressure and downward price trends.
Trend Identification
You can also use sentiment analysis to identify or confirm price trends. When you research what long-term holders, investors, and even traders say about a crypto coin or token, you can determine its price direction.
However, we advise you to do so while making a thorough technical analysis. When traders say positive things about a token and your indicator shows an uptrend is in session, the cryptocurrency will be bullish. On the other hand, increasing bearish sentiment may signal a potential trend reversal.
Risk Management
In general, extreme fear or negative sentiment towards a cryptocurrency or the market can cause prices to fall. FUD, a major cause of negative crypto market sentiment today is caused by a combination of three emotions: fear, uncertainty, and greed. When this happens, you could lose a lot of money trading even tokens with much potential.
Proper sentiment analysis enables you to avoid situations like this and apply appropriate risk management strategies like adequate position sizing, stop loss orders, and take profit levels.
What affects traders’ sentiment?
Many things significantly affect how traders feel about specific cryptocurrencies or the DeFi market in general. Chief among them are influencer opinions, social media, government regulations, major crypto news, and technical analysis.
- Influencer opinions
- Government regulations and major crypto news
- Technical analysis
1. Influencer opinions
Influencers like Elon Musk are notorious for intentionally using their popularity to influence crypto prices with statements and social media posts. Dogecoin and Bitcoin, for instance, are two cryptocurrencies the billionaire mogul has pumped from just tweets.
Influencers and celebrities sharing negative opinions about a token can cause massive FUD, making holders sell and drastic price declines. On the other hand, when they publicly talk about their positive sentiments regarding a cryptocurrency or the market in general, it can create FOMO (fear of missing out) and drive buying pressure.
2. Government regulations and major crypto news
It’s not uncommon for government bodies like the SEC to have issues with significant blockchain networks that violate their rules. When this happens, the native token of these DeFi platforms tends to suffer price drops because it causes massive FUD in the market.
Furthermore, major news, such as the exit of a core team member from a platform, could cause selling sentiment to rise, like when CZ left Binance a while ago. The opposite happens with positive news, like the ETF Bitcoin approval.
3. Technical analysis
Technical analysis can also determine traders’ sentiments about particular cryptocurrencies or the market in general. For instance, if several indicators suggest that a crypto asset has been oversold after an extended period of bearishness, traders exhibit positive sentiment because they see it as a sign that it will rise in price. The opposite would happen if technical analysis suggested oversold conditions.
How To Gather Info For Sentiment Analysis?
Suppose you don’t want to use a tool that saves you time by expertly conducting and visualizing sentiment analysis. In that case, these are the steps you should take to gather public opinion about a cryptocurrency or the market in general.
- Choose Relevant Sources: Firstly, identify platforms where crypto-related discussions occur, such as social media (Twitter, Reddit ), forums (Bitcointalk, CryptoCompare), news websites (CoinDesk, CoinTelegraph), and crypto-specific sentiment analysis tools.
- Collect Data: Utilize web scraping or API services to gather relevant data, including user comments, forum posts, news articles, and sentiment scores. Tools like Crypticorn’s Price Prediction Dashboard do this with ease.
- Preprocess Data: Next, clean and preprocess the data by removing noise, irrelevant content, and duplicates and converting text into a suitable format for analysis.
- Analyze Results: Interpret the sentiment analysis results to understand overall sentiment trends, sentiment polarity (positive, negative, neutral), and sentiment intensity.
- Visualize Data: Visualize the sentiment analysis results using charts, graphs, or sentiment indicators to identify patterns, trends, and sentiment shifts over time.
- Monitor and Update: Continuously monitor and update the sentiment analysis process to adapt to changes in market sentiment and improve the accuracy of predictions and insights.
Conclusion
Sentiment analysis is a very crucial part of crypto price prediction. Without it, it’d be pointless to make any assumptions on how a particular cryptocurrency’s market or price will move.
In this article, we’ve explained how sentiment analysis works and how to carry it out yourself. If you find the process a hassle, you should consider using an excellent sentiment analysis tool like the Crypticorn AI Price Prediction Dashboard.
FAQ
Does sentiment analysis work for crypto?
Yes, sentiment analysis works for crypto. By analyzing social media, news, and forums to gauge market sentiment, investor behavior, and potential price movements in the volatile cryptocurrency market, you can confirm data from other analytics methods to make trades.
How reliable are crypto price predictions?
From the right provider, such as Crypticorn’s AI Price Prediction Dashboard, crypto price predictions can be very reliable. It’s important to note that they consider data from technical analysis and market sentiment today to ensure that their predictions are relatively accurate.
What does strong market sentiment mean?
In crypto, strong market sentiment means that a particular emotion is widespread among crypto traders and is currently influencing their trading decisions. Greed, for instance, tends to be a positive sentiment, and when vital, it can cause a bullish trend.
