Overview

Capital flow, supply and demand, technical analysis, these are some of the key indicators that cryptocurrency traders and investors have been using to make better trade decisions, but crypto’s social factors have often be neglected during the decision-making process. Does social influence have a direct impact on cryptocurrency prices in general? Meanwhile, blockchain and crypto conferences are getting more popular these days, as the blockchain community grows, how key conferences and events could create price action surprises.

Social Sentiment: The Missing Link

Cryptocurrency is an emerging asset class that has been gaining popularity among institutional and retail investors, its decentralized characteristic defines its uniqueness and how it could disrupt the traditional financial world.

However, unlike conventional asset classes, where market data is rather centralized, crypto market information is still relatively fragmented, investors could often overlook some parts of the picture in a noisy market, social influence has frequently been that missing parts.

Social influence has been a distinctive element of the complex structure of the broader cryptocurrency market. A study from Tomaso Aste, Professor of Complexity Science at University College London shows that social sentiment plays a very important role in the cryptocurrency market, in some cases, bitcoin sentiment correlating with other crypto prices even more than with its price.

One of the reasons that make cryptocurrency a sentiment-driven asset maybe it’s the way investors analyze it. Unlike equities or FX, where market participants can evaluate a company by their earnings and financial statements, or gauge a country’s growth by assessing their economic data, cryptocurrency investors often only have limited choices when it comes to market analysis, that patchy information landscape could strengthen investors’ tendency on making trade decision based on their sentiment.

Figure 1: Sentix Bitcoin Sentiment Index (Source: Sentix)

Figure 1 compares the prices of bitcoin and the Sentix Bitcoin Sentiment Index, which tracks bitcoin investors’ one-month expectations of the market. We see the prices and the Index were highly correlated, where negative sentiment extremes are usually indicating rising prices (4Q18). Conversely, high optimism could be a warning signal for upcoming price corrections (4Q17).

The Sentiment Index has touched -0.35 after the November correction, suggesting market participants have started to fear about the plummet of bitcoin prices. However, a rebound could be possible if the negative sentiment deepens.

Social Media Metrics

Social media is another important indicator for gauging cryptocurrency market sentiment, and that’s something that often is forgotten.

Yukun Liu and Aleh Tsyvinski at Yale University Department of Economics studied about Google Trends data and its implication on bitcoin prices, they found out that the data has strong projections on cryptocurrency returns, especially in short-term forecasts. The study stated that “One standard deviation jump in one week’s searches equates to growth in weekly returns of 1.84 percent, and that figure rises to 2.30 percent at the 1-week and 2-week ahead returns.”

Figure 2: “Bitcoin” Google Trends over 90-Days ( Source: Google Trends)

Figure 2 shows the recent 90-day “bitcoin” search rates on Google Trends. On November 22, the figure hit 76, that’s before China’s blockchain announcement, an event that sent the prices of bitcoin briefly above USD 10000 levels. Despite the recent retreat, the search rates seem developing an initial uptrend, and that would be something interesting to closely look at.

Figure 3: “Bitcoin” Reddit Subscriber Growth since 2013 (Source: Redditmetrics)

Meanwhile, we’ve spotted a similar pattern in the “Bitcoin” Reddit subscriber growth figures. Reddit is another social media that has been widely used by the crypto community. Figure 3 above clearly mirrors the prices of bitcoin over time, and this could be another social indicator for crypto investors.

Major Blockchain Conferences Could Affect Prices

Economic calendar is a must-have item for almost all investment banking analysts, it marks all the important events and data releases that potentially able to move the markets. In the cryptocurrency space, however, there’s no earnings results announcements or regular data releases that allow investors to trade with, and that could make blockchain conferences be some of the rarely tradeable opportunities.

While there’s no direct evidence shows that conferences could boost prices, however, developers will take opportunities to make project updates and announce new plans, those messages could build up markets’ hype on that specific token, potentially influence the prices.

Let’s take ETH as an example. September was an event-heavy month for Ethereum, there were at least two major events for ETH developers, including ETHBoston on Sept. 6–8, followed by Ethereal Tel Aviv on Sept. 15. Vitalik Buterin, Founder of Ethereum, was one of the keynote speakers during the Tel Aviv summit.

Figure 4 shows the performance of ETH during and after those two events. The prices of ETH jumped almost 36% in that period (highlighted box).

Figure 4: ETH September 2019 Performance — Daily Chart (Source: Tradingview)

BCH was another similar example. Bitcoin Cash City Conference was held during Sept. 4 to 5 in Townsville, Australia. Where developers and entrepreneurs held discussions on how to increase payment usages using bitcoin cash. The price of BCH rose about 15% in about two weeks after the event.

Figure 5: BCH September 2019 Performance- Daily Chart (Source: Tradingview)

While it’s hard to quantify the price implication on blockchain conferences, however, there’s one thing for sure though is major conferences usually produce large among of noise on social media. Tweets, event updates and highlights, and media coverages, all could boost the social sentiment of that specific coin or token during and shortly after the event. An asset where prices and sentiment influence each other closely, like cryptocurrency, the increase of sentiment could easily produce noticeable price actions.

Conclusion

As a brand new asset class, social influence is a unique element of the broader cryptocurrency market structure, it’s the one thing that distinguishes crypto from traditional assets, and that’s also the factor that traders and investors often overlook. By including the social sentiment factor in the trade decision making process, investors would able to navigate the market with better understand.


Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.


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