SOCIAL SENTIMENT AND CRYPTOCURRENCY: A LOVE/HATE RELATIONSHIP

From a bird’s eye view, cryptocurrency market commentary hubs like Twitter seem like squabble boxes of shilling, whirly-dirly technical analysis charts, and the occasional well-founded prediction.

Speculators are seemingly everywhere, and rapid account growth is rewarded to those able to correctly call some of cryptocurrency’s volatile movements.

Social sentiment analysis is a valuable tool to add to your understanding of cryptocurrency, however, it’s worth exploring the unique slice of history cryptocurrency has offered us in studying how people’s thoughts (and commentaries) affect market movements.

DOES SENTIMENT ANALYSIS YIELD DIVIDENDS?
One of the first things many savvy traders ended up doing is trying to build actionable correlations between social sentiment and certain digital assets.

For example, if an algorithm can predict that when tweets about keyword “TRON” hit a certain volume and display a generally positive sentiment, the price of TRON will increase, it would allow those traders to reap some serious profits.

There are even plenty of 3rd party Google Sheets plug-ins and add-ons that help users calculate their own correlation between social sentiment, social mentions, and the prices of particular digital assets.

So, can you use social sentiment analysis to make better trades? Humphrey B. Neill, the author of The Art of Contrary Thinking, spent much of his professional life studying group thinking. ”A ‘crowd’ thinks with its heart,” Neill writes. “While an individual thinks with his brain.”

However, it’s worth thinking of the subject from a different angle. The vast majority of professional traders, some of the biggest market movers, aren’t only aware of sentiment analysis and technical analysis, they’re capable of using them to lure retail investors into traps. There was a time where cryptocurrency markets were almost predictable for retail investors with a pulse on movements, but with the injection of large amounts of capital and more experienced traders, rogue price swings based on sentiments and rumors became much harder to predict.

A 2018 study by social listening platform Pulsar decided to find out whether people are actually talking about cryptocurrency, paving the foundation to explore whether predictive algorithms that study sentiment analysis could actually lead to consistent profits. Some of the key takeaways from the report include:

Bitcoin sits at the throne of conversation. With 52% of all conversation (the other 48% being spread around every other token), Bitcoin was the most talked about.
Despite rapid price growth, many people still don’t really understand what cryptocurrency is.
People have started to see cryptocurrency as more legitimate and less shady.
The study also found that, in the time period of September 2017 and January 2018, for every 10 percent of social media buzz registered, there was roughly a 5 percent rise in Bitcoin’s price within three days.

However, it’s worth noting that this study was during an intense bull run, and it was extremely difficult to lose money in most digital asset investments. This begs the question – does sentiment analysis function as well during a bear market?

Another study was conducted by Feng Mai at the Stevens School of Business that collected two years of data from Bitcointalk and two months of data from Twitter. The team put together a script that collected comment data and put it into sentiment categories. Then, it used a statistical method known as vector error correction, or VECM, to compare the price of Bitcoin with their findings. Mai noted that: "It's not a one-way relationship, any changes in Bitcoin's price are obviously going to affect the sentiment around it, so we needed to factor in those influences as well."

The study affirmed that social media influence did affect Bitcoin’s price.

DOES SENTIMENT ANALYSIS HAVE A FUTURE?
Social sentiment and cryptocurrency markets have a weird love fling going on that has largely been out of the purview of regulatory authorities until the last year or so. In November 2018, the SEC clamped down on two mainstream figures, boxer Floyd Mayweather Jr. and music producer DJ Khaled for failing to disclose payments they received for promoting Initial Coin Offerings (ICOs).

Even then as cryptocurrency stands today, it’s not very easy to regulate or control price manipulation by influencers and social media commentary floods.

At the end of the day, what moves markets is capital. The birds will chirp all day long, but if they don’t have the money to put where their mouth is, there won’t really be a sizeable effect on price (unless people with capital do act on that sentiment).

Unless whales and the massive movers of markets are tweeting their moves, which they likely won’t, no amount of sentiment analysis will provide any substantial evidence for price predictions.