Fear and Greed in Crypto: Sentiment Analysis in Trading

How do you feel about the cryptocurrency market, or any trading market for that matter? Do you feel like the bulls are coming back to stay? Or do you feel like we are right in the heart of bear country. These are the kinds of things sentiment analysts look at in their work. In this article we will discuss the basics of sentiment analysis and the pivotal role it plays in the cryptocurrency Fear and Greed index.

What is Sentiment Analysis

Sentiment analysis is a topic of study which aims to define whether the general sentiment of public opinion is either positive or negative, in regard to specific subject matter. The Fear and Greed Index is a prime example of how sentiment analysis can be used in trading; although, sentiment analysis can be applied to all sorts of other subjects. As an example, sentiment analysis is often used in political campaigns, as a means to forecast the opinions of potential voters.

History of Sentiment Analysis

Sentiment analysis has been around for as long as written language itself, however it did not become a component of linguistic studies until the 1950s. At this point, linguistic translators realized sentiment analysis could be a highly effective tool for global communication. By the time machine learning came around, sentiment analysis became a crucial tool in the development of translation software.

Sentiment Analysis and Social Media

When social media was first introduced, it immediately gained traction. The internet went from being a research tool, to the hub of social interaction. Websites like Facebook, Twitter, and even Myspace enticed an exponential amount of individuals to freely share their opinions – on virtually every topic – with countless other internet users. This created the continually expanding cornucopia of opinion-based data which circulates the internet today. As sentiment analysis is a measurement of public opinion, social media has become a crucial component of many sentiment analysis based indicators.

The Fear and Greed Index

Although there are a variety of different sentiment analysis powered trading tools, the Fear and Greed Index is the most predominant in cryptocurrency trading. It is modeled after the Fear and Greed Stock Market Index, created by the financial division of CNN. Specifically, the cryptocurrency Fear and Greed Index is measured by:

• Market volatility
• Trading volume
• Sentiment on social media platforms
• The Bitcoin dominance chart
• Google search trends

Each of these factors contribute to the Fear and Greed index. High market volatility, low trading volume, bad crypto publicity on social media platforms, an increase in Bitcoin dominance and a low number of search engine keywords are indicative of fear in the cryptocurrency markets. Consequently, low market volatility, high trading volume, positive sentiment regarding crypto on social media, a decrease in Bitcoin dominance, and an increase in crypto related search engine keywords can be indicative of bullish price action.

The Cryptocurrency Fear and Greed index rolls all these variables into one concise measurement. For this reason, the Fear and Greed index is incredibly valuable to traders. The ability to determine if the market is being driven by either fear or greed by looking at one specific index makes it easy for traders to understand the psychology of the market.

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