The Effect Of Sentiment On The Bitcoin Price

Social sentiment is often correlated with the price of bitcoin and can have a snowball effect on both upward and downward price movements.

Dang Quan Vuong is a trader and market analyst at King Stock Capital Management.

New potential investors who have recently joined the Bitcoin network have expressed social interest in the asset. Whether you’re selling or buying bitcoins, your actions have an inherent impact on whale behavior. In this article, we will focus on how social sentiment affects whale behavior and how it connects to price volatility.

Looking at the social volume (the sum of the content that mentions at least once the terms related to Bitcoin, especially on Reddit, Twitter and Telegram), we can see that the social volume and the price of bitcoin have a positive correlation. So what exactly is the justification for this phenomenon?

The price of Bitcoin is closely associated with social volume. (source)
The AI ​​of social volume is tied to the price of bitcoin. (source)
Active Telegram users are also correlated with the price of bitcoin. (source)

As a result, Google Trend data suggests that the increase in social volume has piqued the public’s curiosity and led them to conduct their own bitcoins searches. It shows that the number of mentions and references of bitcoins on social media is related to the public interest in bitcoins and may have influenced public investment decisions.

Google Trends is connected to social volume. (source)

As evidenced by the number of unique active addresses and the volume of transactions, social sentiment has an impact on all network activity. The cumulative daily count of unique addresses, including senders and recipients, is proportional to social volume, although there is a significant divergence when bitcoin is close to the bottom.

The relationship between daily active addresses and the price of bitcoin. (source)

Similarly, as market participants become more active during an uptrend from the bottom, the total amount of bitcoins sent over the network in a given range often increases, while remaining relatively low during a downtrend.

The increase in the volume of transactions indicates that the market is more active. (source)

Trading volume directly reflects the price of bitcoin as a result of increased activity, and investors behave more aggressively during bullfights and less aggressively during bear markets.

Higher volume in uptrend and lower volume in downtrend. (source)

In social psychology, the snowball effect is a process that begins with a minor state and grows progressively in importance or size. The vivid portrait is when a snowball rolls down a snow-capped mountain, collecting extra snow, gaining more weight and momentum until it finally stops. The spread of bitcoins on various social media platforms can have a similar effect, as it is getting more and more attention, making bitcoin more public awareness and, consequently, producing the snowball effect. The higher the price of bitcoin, the more advertising it receives, which again increases the buying momentum.

An increase in social media content would be a plausible reason for a group of traders and investors to impact the price of bitcoin. They will buy bitcoins and face stimulating content from social media. This would draw more attention to the positive aspects of Bitcoin and make more people aware of it. The euphoria grows as more people enter the market. More and more people are getting involved as a result of more attention and the cycle continues over and over again.

The market continues to rise until it reaches a critical point at which it remains in a state of equilibrium and stops rising due to lack of buying momentum. This is because the reduction in social interest marks the maximum upward momentum and the beginning of a downward trend.

Whales, as many know, play a key role in market movement because they have the ability to drive the price of bitcoin, so it is important to determine when they enter the market. As shown in the following figures, the total number of whale transactions in excess of $ 100,000 and $ 1 million increases in the rally and falls in decline. The charts show that whales are more active during the uptrend and less active in the downtrend, except for panic selling in the COVID-19 pandemic.

Whale transactions in excess of $ 100,000 are often a signal to start an upward movement. (source)
Whale transactions in excess of $ 1 million often result in a recovery. (source)

In a specific time interval, the ratio of total currencies transferred to profit and total currencies transferred to loss grows in upward trends and decreases in downward trends. It means that the profit increases during a rebound until it reaches its peak. Then it goes down until most investors are in the red, at which point the trend reverses.

OP / L of daily transactions is almost higher near the top and lower near the bottom. (source)

In short, the premise of the rebound momentum is growing social sentiment as new investors eagerly enter the market. This self-fulfilling prophecy has historically been attributed to the acceleration of trading volume. When the Bitcoin community thinks that the market will move higher in an upward trend, more purchase orders are placed, which makes the market have an upward trend. Meanwhile, whales are likely to distribute their holdings to newcomers before forcing them to sell them at a loss after a period of time. As a result of the growing public interest, the value of the network expands until there is no more buying momentum, and then bitcoin is finally poured out. This cycle is set to repeat periodically.

This is a guest post by Dang Quan Vuong. The views expressed are purely personal and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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