Market sentiment is the attitude of investors towards a particular asset or product in the market. It is the psychological feeling that develops due to the price movements of securities in the market.
Distinguishing a successful crypto investor from a beginner is by looking at how a user moves around market volatility. Crypto trading can be a very lucrative venture with the right trading strategies. Consequently, companies have turned into monitoring customers’ sentiments on social media platforms to improve their customers’ experiences.
Sentiment analysis tools are AI software that analyses data to gauge the crypto market’s strengths and weaknesses. Let’s have a detailed review of sentiment tools for easy understanding.
Understanding Sentiment Analysis
The traditional sentiment analysis tools work by using reference dictionaries to indicate how certain positive words are and calculating the average of these scores as the sentiment of that text. The second step is the use of Machine Learning (ML) models to make the classification. Traditional sentiment tools classify by generating “features” to predict a “label.”
An example of feature generation is splitting a text into two words then using the words and their frequencies in text as features. Modern Sentiment analysis tools use AI software to help investors understand how customers feel towards particular security or service.
These tools detect tone, emotions, or urgency in social media conversations. They also allow investors to determine which queries to prioritize. Fundamental value is about market performance. Unlike fundamental values, market sentiment is about emotions and feelings. Emotions are one of the leading drivers in the crypto market.
Some investors look for undervalued or overvalued cryptocurrencies based on market sentiments which help them choose investment strategies in the high volatile crypto market.
Investors use terms such as bearish or bullish to describe market sentiments. Bearish means that the stock prices are going down, while bullish means the stock prices are going up. Additionally, optimistic and pessimistic investors use sentiment tools to judge the current market or economic status.
However, it is essential to note that trading using sentiment tools does not guarantee 100% success because it doesn’t indicate future price developments.
Commonly Used Sentiment Tools in Cryptocurrency Trading.
Let’s look at some of the commonly used sentiment tools used in cryptocurrency trading and how they work to understand better what sentiment tools are.
- Crypto fear and greed index
The Crypto fear and greed index is arguably the most popular sentiment tool in the bitcoin market. The team behind Alternative.me created this tool to measure crypto investors’ sentiments. Crypto fear and greed index is different from CNN’s Fear and Greed Index that measures the stock market.
The tool has a needle that indicates whether traders are feeling bold or scared. This tool has calibrations running from 0 to 100 when the value is lower; it indicates that investors are fearful. When the index is high, it’s an indication the investors are greedier.
This tool requires knowledge. When the index sinks below 20, it is the best time to buy, and when the index is above 80, it is the best time to sell.
- Bitcoin sentiment index
Bitts Analytics developed the Bitcoin Settlement Index tool. The tool tracks social media sentiments from crypto investors at any time. This tool works by using a machine learning solution to track emotions whenever investors mention bitcoin on social media platforms. Although the tool may provide fascinating insights, critics are still skeptical about this tool.
According to critics, one can’t determine the tool’s viability since it’s not immediately clear which factors the tool takes into account during the computation process. The tool works by dropping the indicator when market sentiments turn bearish. When the needle climbs, it means the feelings on social media are bullish.
- Bulls and bears index
Augmento created this tool to indicate how bearish or bullish social media sentiments are towards bitcoin. The tool works on social media platforms such as Twitter, Reddit, and Bitcoin Talk. Additionally, this tool’s index indicates a value between 0 and 1 and is sensitive to 93 various sentiments and topics.
The bulls and bears index works by indicating bearish when its indicator is close to zero. A high reading of close to one indicates that sentiments on social media are bullish. If social media opinions sway investors, they buy bitcoin when they are bullish and sell when sentiments are bearish.
Pros and Cons of Sentiment Tools
Imagine a situation where one is required to read thousands of accumulated monthly comments at once. These tools help investors gauge how their customers feel without going through all of their comments. Using sentiment tools, one can narrow it down to various customer segments and understand its sentiments.
The main limitation of these tools is that they are not a complete replacement for reading survey responses. There are helpful comments in some social media segments; sentiment analysis tools can only point to you the critical statement you should read.
Cryptocurrency investors consider sentiment tools as one of the best strategies to use in the ever-volatile crypto space. These tools give successful results if they are well used. However, as seen in the information above, they do not guarantee 100% success. They are supposed to be used together with other market indicators to maximize profits since they depend entirely on people’s opinions.
With the above information, both new and experienced crypto traders can gain an insight into how to go around sentiment tools. However, it is vital to consider extensive research on the sentiment tools that will favor your needs.