How to Use Sentiment Analysis to Gain Insight into the Trends and Opportunities of the Encrypted World

Market sentiment is an assessment of traders' attitudes and emotions, which will affect traders' investment decisions. Especially in the highly volatile crypto market, market sentiment may fluctuate violently in a short period of time. The ups and downs of market sentiment often mean new opportunities, or new pressures and risks. If you don't know sentiment analysis in cryptocurrency, then this article is for you.

This article will introduce you to the sentiment analysis method and classic sentiment analysis indicators in the encrypted world, and share several related practical tools, so that you can understand the sentiment of the encrypted market more scientifically and grasp the rise and fall of token prices more accurately.

What is sentiment analysis?

The term "sentiment" in the financial environment refers to opinions and feedback on market conditions. Crypto market sentiment describes investors' reactions and attitudes to macro market prices, and also reflects the psychology of the crowd involved in cryptocurrency trading and development.

Sentiment analysis in a colloquial sense is the process of detecting positive or negative sentiment in text. It was initially used to detect sentiment in social data, measure brand reputation and understand customers, and score a piece of text with text corresponding to sentiment. For example, "can't wait" corresponds to +0.5 points, "running" corresponds to -0.4 points, etc., it will assign a score to each word according to how negative or positive each word is, and then add all the points together to see the overall sentiment of the sentence. Usually this score is between -1 and +1. -1 indicates a very negative sentiment and +1 indicates a very positive sentiment.

This kind of analysis method can actually be widely used in the encrypted world. The encrypted sentiment data comes from text information on social media platforms, such as Twitter, Discord, Telegram, etc. A sentiment analysis tool can summarize the real-time dynamic information of major platforms and protocol communities, and analyze and summarize the current market sentiment according to the scoring system and corresponding weights, thus playing an auxiliary and guiding role in the market behavior of investors. Investors would otherwise need to manually, time-consuming browse different social networks to discover the perceived crowd psychology of a particular token.

Sentiment Analysis in the Crypto World

Just on the 23rd of last month, four researchers from Pennsylvania State University in the United States released a research paper on "Cryptocurrency Sentiment Analysis". Its findings suggest that social media sentiment significantly predicts cryptocurrency returns, with fundamental events playing a role in shaping sentiment. Furthermore, the study also finds that market exuberance is positively related to momentum returns but not positively predicts volatility, suggesting that sentiment influences returns through price perception and demand shocks rather than risk premia channels. Overall, the paper highlights the importance of sentiment in understanding and predicting cryptocurrency market dynamics.

Cryptocurrency Fear and Greed Index

The Crypto Fear and Greed Index is an analytical tool that measures market sentiment in the cryptocurrency space, especially Bitcoin. The index ranges from 0 to 100, with values closer to 0 indicating extreme fear and values closer to 100 indicating extreme greed.

The Crypto Fear and Greed Index is calculated using six main factors, each weighted by perceived importance. These factors include:

• Market Momentum and Volume (25%): The calculation of this index compares the current daily volume and momentum to the 30-day and 90-day averages. Larger selling volumes and negative daily market movements indicate significant selling pressure, thus increasing panic. In contrast, large buying volumes and repeated positive market moves point to heightened greed.
• Volatility (25%): The more volatile a crypto asset is, the more fearful investors may be, resulting in a lower score for this index. As with market momentum and volume, volatility and value declines (maximum drawdowns) are compared to 30-day and 90-day averages. *Trend (10%): Higher search volume generally leads to greater potential greed and thus higher index score. However, not all searches are weighted equally, with negative searches such as 'bitcoin market manipulation' and 'bitcoin crash' pointing to greater fear in the market.
• Dominance (10%): Dominance looks at Bitcoin market capitalization as a percentage of all cryptocurrencies market capitalization. It is generally believed that Bitcoin's increased dominance (increased market share) represents a scarier market, as investors may view Bitcoin as a cryptocurrency 'safe haven'. In contrast, the index sees increased altcoin investment as a more rapacious market, with more speculators willing to invest in lesser-known assets in hopes of reaping big returns.
• Social Media (15%): The algorithm collects and counts posts with cryptocurrency-related hashtags and measures the velocity of cryptocurrency-related posts and the amount of engagement on posts over a specific time period. A higher interaction rate typically responds to more market greed, while a lower interaction rate may indicate more dire market behavior.
• Surveys (15%): Surveys can be used to gauge investor sentiment towards cryptocurrencies. A bullish answer can indicate greed, while a bearish answer can indicate fear.

The index is a more comprehensive reflection of market sentiment and is also a sentiment indicator and risk management tool that helps investors make informed decisions and avoid excessive emotional reactions, as overcorrections tend to occur when markets are driven by extreme fear or greed. Specifically, investors can use it to:

• A measure of 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). *Information for investment decisions: high value can mean caution or sell, while low value can mean a good time to buy. However, other market factors should always be considered and due diligence performed.
• Risk Management: The index can help manage the risk level of a portfolio, helping to balance potentially high-reward, high-risk investments with safer, lower-return investment options.

Bull and Bear Index

GMI Bull and Bear Index is an index based on the price change rate and the state of the funding rate of the perpetual contract. In the historical backtest, the index has a strong ability to identify the bull-bear transition in the medium and long-term period (half a year to one year). It can also provide observation assistance for important reference directions such as public trading psychology, market frenzy, and short-term breakthrough intentions.

The GMI index is directly proportional to the rising speed of the BTC price, and inversely proportional to the funding rate of the perpetual contract. It is calculated based on Bitcoin's historical price trend changes and funding rate, namely: GMI = Bitcoin price increase rate / Bitcoin perpetual contract funding rate level.

To use the GMI bull-bear index, you must first know that when GMI >= 0.4, it is a bull market; when GMI < 0.4, it is a bear market. Secondly, we know that GMI has the following four states:

• GMI falls, price rises: it is a negative signal, the rising speed of the energy of the bulls is less than that of the energy of the bears, which means that the market is panic, and there is room for price repair;
• GMI rises, price falls: it is a positive signal, the decline rate of bullish energy is less than that of bearish energy;
• GMI and price rise together: it is a positive signal, the rising speed of bullish energy is greater than the rising speed of short energy;
• GMI and price fall at the same time: it is a negative signal, and the decline rate of bullish energy is greater than that of short energy. Since the launch of the GMI Bull and Bear Index, the accuracy rate has been very high, and it has successfully helped some users avoid the sharp drop and bravely increase their positions. It can be used together with the fear and greed index, etc., to assist one's own investment decisions.

Practical analysis tools

1. Cryptocurrency Greed and Fear Index Dashboard Created by Investment Analysis Website Alternative.me

The fear and greed index created by the website is updated once a day. It not only quantifies and classifies emotions, but also uses visual color gradients to intuitively and quickly let users understand the current market fear and greed index level, and summarizes the index information of yesterday, last week, and last month.

The Current Crypto Fear and Greed Index is an excellent benchmark for crypto traders, investors, and market analysts, with the advantages described above. But it also has its limitations, such as its focus on Bitcoin and skewed emotional responses to other crypto assets. Its calculation is not completely transparent, and the calculation weight of the major category is publicly stated, but the composition of the subcategories does not disclose the calculation percentage.

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

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

Inside the social media analysis page, users can enter the keywords they want to query, such as buy the dip, sell, bottom, etc., and show users the distribution data from social platforms such as telegram, reddit, twitter, etc., and then perform a quantitative summary in the time dimension.

The user interface of Santiment is very user-friendly and it is an easy-to-use platform. It has a large number of data sources, including on-chain, social media and financial reports, and the longest data history can reach 2009. More than 7 million pieces of social information are parsed daily, and the available indicators have also expanded to 731, and there are 22 available wallet tags, and the data provided are all real-time and up-to-date. But it also requires higher fees compared to other cryptocurrency analysis platforms.

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3. Social media monitoring and analysis tool LunarCrush LunarCrush

Using algorithms governed by artificial intelligence to gather information and return it to users in an easy-to-understand manner, enabling users to search, follow and actively participate in discussions on trending topics across all social media.

On LunarCrush, more than 2000 different cryptocurrencies are listed, categorized according to market sentiment identified by data extracted from different sites considered by the application. Social network Twitter, Reddit forums, Youtube video hosts, and Medium blogging platform are checked by algorithms managed by artificial intelligence, which provides users with a set of indicators summarizing the attitude of the cryptocurrency market.

For example:

• Social Volume: The number of mentions of crypto in a given time period. If someone uses the word bitcoin on Twitter, the social volume of bitcoin increases by 1 during the analyzed period.
• Social Engagement: The level of engagement of the community around crypto. The metric takes into account reactions to publications, comments and even shares to rule out any kind of manipulation and spam.
• Social Contributors: Like "social volume" which collects unique mentions, this stat identifies the number of unique people talking about a corner in a given time period.
• Shared Links: The number of times a cryptocurrency-related URL link was shared, these could be articles, block explorers or charts.

According to news on July 12, LunarCrush completed a US$5 million Series A financing. This round of financing was co-led by Draper Round Table and INCE Capital. LunarCrush also 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 a given interest.

The project can be accessed without registration, and it is free. Through various and optional indicators, users can more intuitively understand the current popularity of all encrypted assets, which is helpful for investors' investment decisions, and can get rid of relying solely on the K-line to judge market trends.

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4. veDAO: Web3 investment compass

As a DAO-led decentralized investment and financing platform, veDAO is committed to helping investors accurately capture Alpha and achieve 100-fold returns. It has a TB-level massive project database, covering nearly 70 mainnet ecosystems and 40 web3 tracks. Including 22000+Twitter KOL, 3700+ investment institutions, 20000+ giant whale addresses, 6000+ related information. Not only does it have a complete project evaluation system and a veDAO expert committee composed of well-known web3 institutions, but veDAO will also launch two tracking modules in August - Twitter sentiment tracking and smart money signal tracking.

By taking advantage of the massive database, the Twitter sentiment is analyzed and tracked, and the popularity of the current project is intuitively displayed through intelligent sorting. The analyzed indicators include: the number of KOL mentions and changes, how many KOL mentions, token price changes, etc. It allows users to quickly and accurately understand where the Twitter sentiment is most concentrated, so as to grasp the latest token market and information, which is helpful for the adjustment of investment strategies, and can track Alpha faster and avoid risks earlier.

The upcoming new function of veDAO also uses AI interaction method, combined with a large language model, to easily use information through AI. Twitter sentiment analysis for specific projects/tokens is more refined and multi-dimensional, from the number and changes of Twitter fans, the number of discussions and changes, how many KOLs follow and changes, how many giant whales follow and change, and how many NFT KOLs follow and change. Use data visualization to intuitively and quickly display the frequency and changes, and efficiently assist investors to analyze the sentiment of the token community, and can combine the smart money signal tracking function to adjust investment strategies based on evidence, and minimize risks while tracking Alpha projects.

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Conclusion

Encryption sentiment surrounds us every minute and every second. Only by learning to analyze the fluctuation of sentiment can we grasp the opportunities and risks of the market one step further, and finding an efficient analysis tool that suits us can also make investors more accurate in analysis. Currently, there are more and more encryption data analysis tools, and more practical and easy-to-use tool items are selected in the text to share. I hope readers can use such analysis tools flexibly to help you better predict and judge the market and make optimal investment decisions.