How Sentiment Analysis Tools Work in Crypto Trading

Beginner’s Guide / 18.09.2020

Sentiment tools are powerful when used in crypto trading. They allow traders to gauge distinguished crypto markets together and check their strengths and weaknesses. Arguably, sentiment analysis is underutilized as far as traders’ arsenal is concerned. Many misconceptions are found to challenge the tools applications in analysis. 

Sentiment analysis tools enhance good yield if used accordingly. Interestingly, crowd thoughts are buying when sentiment is high and trade when it is low. Getting solitary ideas and using the tools can help achieve maximized returns. However, people have different opinions, perhaps one that partly misleads, some claiming to know how the market hovers between bull and bear status. 

At the moment, we need to discuss some of the tools and how they function. Below are views about three tools that can direct on trading to bring out smarter decisions. 

Bears and Bulls Index

This tool’s utilization is primarily in the bitcoin market. Ever since its introduction in the market, it has played an essential role in bitcoin trading. Innovated by Augmento, its primary use is in social media as an indicator. It shows bearish and bullish conversations on bitcoin—the popular platforms where users engage in such talks are Bitcoin Talk, Reddit, and Twitter. 

The tool index illustrates a value ranging between zero and one. An identified classifier computes the index’s outcome, which uses a crypto-specific language that the system learns after the necessary training. Consequently, it can access social media conversations as it has a high sensitivity to them, with about 93 different topics and sentiments explained.

How to Use It

Traders can leverage it to gauge the investors’ moods by analyzing several social media messages and mentions. The indicator checks on the values between 0 and 1, whereby a low score, specifically close to zero, is bearish; a high reading on the same means investors are bullish. A high reading means it’s in closer proximity to one. 

If a willing trader believes in thoughts of the crowd, he can apply this. He might need to buy bitcoin when the bear and bull index is starting to spike. When dropping, it is an excellent opportunity to sell. 

Several experts in the market exploit this index; however, some never understand the tool’s function. If they are willing to learn, some companies assist them in acquiring the skills. 

Bitcoin Sentiment Index

The Bitcoin Sentiment Index is another popular tool when performing markets and social media analysis. The tool majorly aims to provide insight into how crypto investors feel at different times. 

There is machine computation with learning solutions on social media to enable that. The indicator value works through reading posts that mention bitcoin on different platforms. However, the tool has been facing criticism as most argue on the difficulty in gauging the tool’s viability; there have been unclear factors considered in the computation process. 

How to Use It

The Bitcoin Sentiment index tool is a bit complex in comparison to the others discussed. Like the bear and bull index, it depends on social media activity for values.

Traders assure that reading the values is easier contrary to popular belief. They are keen to check when the indicator line drops, as that is when its function starts. If the sentiment line drops, the market sentiment will turn bearish. Investors experience more bullish sentiments when the investment line spikes. 

Greed Index and Crypto Fear

It is the most popular sentiment indicator used in the entire bitcoin market to measure crypto investors’ sentiment. The designers of the outstanding tool were a team who created Alternative.me. They made a great solution that is different from CNN’s tool. 

The tool shows whether traders are scared or feeling bold through the use of a specific needle. The needle moves from left to right simultaneously with measurements found between 0 to 100. When the value is lower, investors become more worried. The investors will feel greedier if the index value rises higher. 

The popularity of the tool has enabled traders to reap big. However, they need some knowledge of how it operates and how it applies in different situations. Different factors help to determine market momentum, volatility and volume bitcoin dominance, and social media momentum. 

Readings

If the index will show investors’ concern, it translates to the best moment for buying. If the people show signs of greed, it’s the right moment to sell. When the index sinks below 20, then fear prevails. An investor here decides whether to trade, considering the risks of loss. A reading of 80 and above means that investors can sell. They have more confidence in the markets if they notice the value is 80 + than the below 20 marks.

Conclusion

Crypto trading is a lucrative sector to earn massive returns, and using sentiment tools may distinguish a successful investor from the rest. As much as sentiments are not the only determinants of the shifts in crypto markets, they are an essential indicator of what might or might not happen. 

Therefore, sentiment tools are the right arsenal to bring within the crypto market battlefield. They show advancements in technology, helping traders buy and sell in the most volatile financial markets. Ultimately, future developments of prices are not always dictated by the market sentiment. A good trading habit will be to conduct in-depth research on other factors and their interrelation with market sentiments. 

Adam is an outgoing young lad who likes adventures and discovering new things. Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.