As #Nobel Prize-winning economist Robert Shiller put it, “Bitcoin is a social phenomenon.”
Rumors, #fear, and hype all play an enormous #role in influencing the price of cryptocurrency, but these things are not so easy to identify on a chart. While many institutional traders use#technical analysis to gain insights into #price action, to ignore the #emotional state of the market is to ignore a huge aspect of what defines it.
Those who truly understand how the market ‘feels’ have a huge #advantage over competing traders and #institutions – so how can such a thing be #measured?
#Acknowledging the influence of psychology and emotions in the market is one thing, but the key is being able to measure it and use it to create an #actionable, data-driven trading #strategy – doing this is called sentiment #analysis.
Over the last ten #years, interest in sentiment analysis has grown drastically, as shown in the Google #Trends chart below.
QUANTITATIVE SENTIMENT ANALYSIS
In a way, it seems quite straightforward to gain some sort of basic insight into the public #sentiment of a single company or #cryptocurrency project. For example, if certain influencers paint an overwhelmingly negative picture of #Bitcoin on a given day, it’s likely that the public #entiment will have a negative trend.
This, of course, is #ue to the well-documented phenomenon of crowd #psychology which a recent survey #indicates plays a strong role in the price of Bitcoin.
The answer to measuring and predicting this phenomenon with relevant data points lies in analyzing vast swathes of #social media updates on platforms like Twitter and #elegram as well as the news headlines and forum comments sections. Unlike reading the daily news on Bitcoin, this can’t be done efficiently by a #single person – this is a #job that only artificial intelligence can handle.
The recent fusion of #AI and #social media data can give hedge funds the data required to gain real insight into the emotional state of the #cryptocurrency community as a whole along with #communities for individual projects.
CRYPTO #HEDGE FUND DARWINISM: SURVIVAL OF THE FITTEST
A recent report by #crypto research and fintech analysis firm Autonomous Research LLC showed that as of August 2018, most #crypto hedge funds were down 50% for the year, with many #funds shutting down. As the bear market continues and panic sets in for many retail investors, irrational #emotions play an even stronger role in the price #action which makes understanding market #sentiment all the more important, helping to reduce #risk.
The ongoing “#crypto #winter” is creating arguably the toughest conditions for crypto hedge funds to date. Only the strong will #survive, and part of that strength lies in adaptability.
Hedge funds need to take a #lean, cautious approach towards low-risk investments with a high chance of a good #ROI, and part of identifying low-risk investments lies in tapping into the crowd #psychology at play among retail #investors.
Yale economists recently published a #study which found that #cryptocurrencies behave differently from other asset classes, but could be predicted by monitoring investor attention. According to the Ivy League economists, cryptocurrency price #movement is tightly correlated with the number social media mentions it receives on Google, #Twitter, etc., with prices surging as abnormally high #mentions occur.
SENTIMENTS AND TOPICS MOVING THE #CRYPTO MARKET
Sentiment analysis is used to greatly #augment existing trading strategies, based on, for #example, technical indicators or price action. Here #sentiment analysis provides alternative signals, which are especially relevant for intangible assets.
Human traders make rash #emotional decisions. Using #technology, we can monitor how sentiments and trends drive investment decision, and use that to inform trading #strategy.
By scientifically analyzing the reaction of the #cryptocurrency community as a whole, analysts can now finally place an ear to the beating heart of the #cryptocurrency market and transform opinion into data.
About the Author: Michael Baumgartner is the CEO of Augmento, an #AI firm offering proprietary software that can grasp market-driving emotion and topics of #discussions within #milliseconds, giving hedge funds a vital competitive edge in the fast-paced crypto #markets.
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