A Noteworthy Sentiment Change

Bitcoin and other cryptocurrencies have declined quite sharply in recent days. Here is an overnight snapshot of the daily chart:

(Click on image to enlarge)

Bitcoin corrects again…

It is difficult to gauge sentiment on BTC objectively, but there is a service that tries to do just that. According to its greed & fear barometer, the recent decline seems to have triggered quite a bit of apprehension:

The BTC sentiment measure of alternative.me has flipped all the way from “greed” to “extreme fear” in just one week. 

Here is an overlay chart that shows the history of the indicator compared to the Bitcoin price:

(Click on image to enlarge)

Greed and Fear barometer vs. the Bitcoin price over time

Obviously, low readings have to be interpreted differently in bear markets than in bull markets, which is quite normal. However, it is quite surprising to see the indicator at such a low level at a time when Bitcoin is still trading relatively close to its recent high. Provided that BTC is still in a bull market, this could well be a sign that a buying opportunity will soon be at hand. 

It will be interesting to see whether the barometer will indeed work as intended in the current downturn.

Addendum: Calculation of the Greed and Fear Barometer:

Here is a brief explanation by alternative.me of the components used in the calculation of the indicator and their weighting: 

Volatility (25 %)

We’re measuring the current volatility and max. drawdowns of bitcoin and compare it with the corresponding average values of the last 30 days and 90 days. We argue that an unusual rise in volatility is a sign of a fearful market.

Market Momentum/Volume (25%)

Also, we’re measuring the current volume and market momentum (again in comparison with the last 30/90 day average values) and put those two values together. Generally, when we see high buying volumes in a positive market on a daily basis, we conclude that the market acts overly greedy / too bullish.

Social Media (15%)

While our reddit sentiment analysis is still not in the live index (we’re still experimenting some market-related key words in the text processing algorithm), our twitter analysis is running. There, we gather and count posts on various hashtags for each coin (publicly, we show only those for Bitcoin) and check how fast and how many interactions they receive in certain time frames). A unusual high interaction rate results in a grown public interest in the coin and in our eyes, corresponds to a greedy market behavior.

Surveys (15%)

Together with strawpoll.com (disclaimer: we own this site, too), quite a large public polling platform, we’re conducting weekly crypto polls and ask people how they see the market. Usually, we’re seeing 2,000 – 3,000 votes on each poll, so we do get a picture of the sentiment of a group of crypto investors. We don’t give those results too much attention, but it was quite useful in the beginning of our studies. You can see some recent results here.

Dominance (10%)

The dominance of a coin resembles the market cap share of the whole crypto market. Especially for Bitcoin, we think that a rise in Bitcoin dominance is caused by a fear of (and thus a reduction of) too speculative alt-coin investments, since Bitcoin is becoming more and more the safe haven of crypto. On the other side, when Bitcoin dominance shrinks, people are getting more greedy by investing in more risky alt-coins, dreaming of their chance in next big bull run. Anyhow, analyzing the dominance for a coin other than Bitcoin, you could argue the other way round, since more interest in an alt-coin may conclude a bullish/greedy behavior for that specific coin.

Trends (10%)

We pull Google Trends data for various Bitcoin related search queries and crunch those numbers, especially the change of search volumes as well as recommended other currently popular searches. For example, if you check Google Trends for “Bitcoin”, you can’t get much information from the search volume. But currently, you can see that there is currently a +1,550% rise of the query „bitcoin price manipulation“ in the box of related search queries (as of 05/29/2018). This is clearly a sign of fear in the market, and we use that for our index.

Charts by cryptowat.ch, alternative.me