A variety of indicators are used to assess the performance of a cryptocurrency. The Relative Strength Index, Awesome Oscillator, inflows, and outflows are just a few of the various means that may be used to determine whether or not to invest in a particular cryptocurrency. The social sentiment indicator, on the other hand, is rather underutilized but when used properly, can offer additional insight to investors concerning the buzz surrounding a project. Continue reading to learn more.
What is the social sentiment indicator?
The social sentiment indicator is a compilation of all social media activity related to a cryptocurrency. The indicator includes postings from the project’s official handle, involvement among its community members, and even posts mentioning the particular cryptocurrency. The majority of the data used to calculate the indicator originates from posts on popular social media platforms such as Twitter, Facebook, and Reddit.
Although the idea has been around for years in traditional assets, it is especially effective for determining investor interest in cryptocurrencies because the bulk of investors utilize social media platforms to discuss anything relevant to a crypto project of their choice.
To understand this metric better, let’s take a look at the data analytics firm LunarCrush. The platform has divided up its social sentiment indicator into social mentions, social dominance, social engagements, social contributors, and spam volume. The segments are then presented in terms of the percentage change for every time frame selected. For instance, if the social engagement tab is up by 36 over the day, that means that there is a 36 percent increase in the number of posts that tag a certain crypto project on social media websites.
Why is it important?
Nowadays, there are thousands of crypto projects to pick and choose from but sieving through every one of them can be quite a daunting task. In contrast, a rather straightforward way to gauge crypto, besides its functioning, of course, is to look at how large and active the community is. In other words, the larger and more engaged the community, the more trust is placed in that crypto project and the more likely it is to deliver on its promises. After all, a community is what makes a project tick and the social sentiment indicator is important to measure the community.
Meanwhile, those actively trading in cryptocurrencies may also find the social sentiment indicator useful. Platforms such as LunarCrush provide users with a visual representation of a crypto’s social sentiment by graphing it on a chart.
The graph can be superimposed with a crypto’s price to provide useful insights. For example, a trader would be able to determine from the social sentiment graph that a cryptocurrency’s price would be less affected by new listings than, say, changes to its core developer team. If a project announces that its core developer has abruptly quit, a trader may be tempted to short the project’s tokens, even though the larger market is trading in a risk-on environment.
Furthermore, traders can use the social sentiment indicator to measure market volatility. An unusually high social sentiment score indicates that a crypto’s price might be more volatile than others with a low social sentiment score. This means that gains will be comparably higher and losses will be comparably steeper. Traders can use this data to look for scalping or shorting opportunities.
Limitations
Alas, no indicator is one hundred percent reliable if used in isolation and the social sentiment indicator is particularly vulnerable to this statement. The indicator can often lead to ‘noise’ trading, which is trading based on hype and rumor instead of utilizing technical or fundamental analysis. This can turn especially dangerous since pump and dump schemes are common in crypto.
An investor may invest in a project knowing that it has lately been supported by a crypto whale, only to discover later that the whale has begun to dump his/her stake, resulting in losses.
Moreover, it is fairly common for community-driven meme coins to have a relatively higher social sentiment score compared to other coins in the market.
Projects such as BabyDogeCoin, Dogecoin Shiba Inu, and Floki Inu consistently rank high on the social sentiment index but the same does not carry many implications on their price, making it a slightly less redundant tool for those looking to invest in meme projects.
Finally, the indicator simply shows how many people are discussing crypto, not how many are investing in it. While experienced traders would avoid a project if they discover that its community members are not putting their money where their mouth is, novices may fall victim to scam projects that rely solely on community hype rather than genuine development.
Conclusion
The social sentiment indicator is not a perfect tool for analysing a crypto’s performance, but it can be when used in tandem with other analysis methods. Investors are advised to use a mix of technical and fundamental analysis before employing the social sentiment indicator to judge the financial health and stability of a crypto project.
