According to an old saying on Wall Street there are two emotions that drive the markets: Greed and Fear. There is even a Greed and Fear index. It is understandable that most people would like to get rich quick. However, the taste of success often causes investors to become greedy. They exchange common sense for impulsiveness. Then their greed turns to fear when prices start falling. Where there is volatility in the markets, we see the see-sawing of these two emotions. A good example is the dot.com boom of the 90’s. Investors and Traders bought internet-related stocks almost in a frenzy until a massive bubble formed. Many of these companies were startups that would not even return a profit for years to come. The bubble finally burst when common-sense was restored, fear ruled and real value (i.e. very little) returned to the market.

Fear and Greed Index CNN

Source: CNN

History Repeating Itself

As Propellerheads and Shirley Bassey sing, history always repeats itself. In 2017 we saw the price of bitcoin skyrocket to almost $20000 and then plummet as greed gave in to fear. We also saw how the news of a slowdown in China’s economic output sent Apple shares plummeting. This defies common sense.

It is foolish to pin the hopes of a generation on ever increasing sales of iPhones. Moreover it hardly comes as a surprise that the US-China trade war will take its toll, amongst other factors. Yet the obvious is exactly what greedy investors turn a blind eye to. When a taste of reality corrects their vision all hell breaks loose and red (my least favourite colour) is splashed across the financial headlines.

What is interesting is that it is only the news of, and not the evidence of, that usually spooks such investors. Those whose investment decisions are based on evidence, i.e. fundamentals, are often able to capitalise on market volatility. They do this by closely watching public sentiment.

Bitcoin price chart no price axis

Source: Coinbase

 

Market Sentiment

Market Sentiment is the measurement of the overall attitude of investors toward a specific security or financial market. In general terms analysts look at the movement of prices up and down to determine whether sentiment is bullish or bearish. The origin of these terms varies but the explanation I like is as follows. In the old days the stock market didn’t exist. To make a buck some investors pitted bulls and bears against each other and punters gambled on the outcome. Egged on, the bull would thrust its horns upwards whilst the bear would swipe its claws downwards. Hence a bull market goes up and a bear market goes down.

Today, regardless of whether the bulls or the bears are winning, we can gather data from additional sources to measure market sentiment. An important one is public sentiment, notably social media and in particular Twitter.

Traditional Market Sentiment Indicators

So how can we use sentiment as a tool for making good investment decisions? In the traditional markets they calculate sentiment using various indexes that, amongst other things, measure volatility, high/low price ratios and moving averages. By using these indicators some investors and traders will find stocks that are overvalued or undervalued. They will then buy or sell shares based on whether they are overbought or oversold.

Crypto Market Sentiment Indicators

The crypto markets are a very different beast. Of course, they both have common trends and similarities. However the crypto market operates in a very different manner to that of the stock market. When you invest in cryptocurrency, you invest in a currency that is independent of a company. When you invest in stock, you invest in the company itself. While the value of any company can fluctuate, you still know that the company has some value based on its underlying assets and income.

In the traditional markets traders and investors conduct fundamental, technical and sentiment analysis to determine which stocks to trade, and when. The historical behaviour of Cryptocurrencies, however, defies the norms of fundamental and technical analysis. Sentiment analysis then becomes much more important, particularly when trying to ascertain when a market is bottoming out.

Twitter is a constant monitor of public sentiment. Therefore, incorporating the sentiment found therein is an increasingly useful means for making trading decisions. This is particularly true for traders who thrive on going against market trends for profit.

Crypto Sentiment Alerts

This is what Causality is enabling with the launch of its new Crypto Sentiment Alerts product. In-depth analysis is done of crypto-related tweets. In near real-time subscribers are alerted to sentiment events that meet their criteria. Check out the product datasheet at cryptosentiment.ai.


Also published on Medium.