What is market sentiment analysis and how can it help you make better investment decisions?

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Key Takeaway: Market sentiment is the collective attitude towards an asset or financial market. Sentiments exist in all markets, especially raw ones like cryptocurrency. Market sentiment analysis considers an investor’s collective thoughts, feelings and moods surrounding an asset. These feelings typically don’t reflect an asset’s fundamental value, but rather the short term potential for price action. Market sentiment analysis is a form of research that uses emotions to predict price fluctuations by tracking attitudes. This can help investors have a better understanding of hype and fear surrounding a specific asset, or in this case cryptocurrency. This should help seasoned investors make better short term decisions.

Just like most assets, the prices of cryptocurrencies are typically strictly determined by supply and demand. However, because the crypto market is still very raw and immature, factors like public opinion can significantly influence short term price movements. The constant shifting of a market’s public perception is known as market sentiment and some traders attempt to analyze it to make trades based on short term price movement potentials. This is because besides providing insight into market demand, market sentiment analysis can also showcase potentially profitable short term trades.

Why is market sentiment important?

Market sentiment analysis can help investors get better understandings of short-mid term price action. This can provide more regular traders with better understanding of when to enter and exit their positions. On top of that, sentiment analysis can help investors control their emotions and discover potentially profitable opportunities by buying before and selling the peak of the hype.

How does market sentiment analysis work?

To get a good understanding of sentiment, investors typically resort to exploring relevant social media channels and communities in order to understand how the community and investors of a particular project feel. Official forums, Discord servers, Telegram groups and Twitter communities are all great sources of information. On top of that, some investors take personal interaction one step further and attempt to get in direct contact with a project’s founders and core team members.

But social channels are just the first step. On top of monitoring social channels, investors can also stay up to date with the latest news and opinions through large media outlets, by tracking large transactions and by measuring the level of hype by using Google Trends. However, one of the best – and my personal favorite – ways  to track market sentiment is to use market sentiment indicators.

Indicators represent market sentiment in graphical form or with some kind of scale. Most sentiment indicators are primarily focused on Bitcoin, but considering that Bitcoin currently dictates what the rest of the marker does, investors can use Bitcoin market sentiment indicators to track the overall sentiment of the entire market.

Final Thoughts

Analyzing market sentiment can provide great insight for potential short-mid term gains. However market sentiment analysis shouldn;t be an investors only research tool. To maximise effectiveness of sentiment analysis, it’s best to combine it with some form of fundamental analysis to ensure that you like the fundamentals of a project before you attempt to trade it in the short term.

Personally, I use sentiment analysis to provide me with an overview of the entire market’s sentiment so I can find good opportunities to either increase or decrease my positions. Essentially, sentiment analysis helps me find my entry and exit points on my long term holdings.

Sentiment analysis is particularly useful in cryptocurrency because the market is still relatively small and public perception can cause significant price fluctuations. By using the methods outlined above, investors can begin to understand market sentiment better – which can help them make better shorter term decisions. 

An individual’s ability to perform high level sentiment analysis typically improves over time. However in some cases, sentiment analysis does not work. This is because the crypto market is still immature and prone to irrational movements. Because of this, it’s recommended that investors only perform sentiment analysis as a guide to help provide insight on when it’s a good time to enter and exit positions that they’d be comfortable holding for a long period of time.

Disclaimer: Nothing in this article is intended to be financial or investment advice. This article is for educational and informational purposes only.

Hi, I'm Jack. I'm a creative and technical writer in the cryptocurrency industry. I chose a career in blockchain because I believe that it is the technology that will have the biggest impact on and revolutionise the world as we know it. Being involved in that excites me. Although its easy to get caught up in the hype surrounding cryptocurrencies, I'm more excited to see blockchain realise its full potential and completely disrupt the legacy systems of the 21st Century. I've been in this industry for multiple years and I've worked for some of the biggest research and development companies as well as smaller, startup crypto projects.