Finding Signal in Sentiment: Can Insight into Emotion Improve Investment Decisions?

It’s a widely recognized if often underappreciated, fact: most of us would rather defer long-term gain for short-term reward. Offer us a hamburger today, and we’ll tell you our diet starts tomorrow. Then, tomorrow comes around, our options are limited and the burger everyone else is eating looks so good — the cycle repeats.

What does this have to do with crypto-investing, we hear you ask? Well, more than you might think.

Feelings Matter More Than Intentions

Despite what you think you’ll do tomorrow: if an action with a more immediate feedback loop comes to pass, then emotions take over, and you may well pursue the reflex reaction instead of doing what you know you should do. You’ll take the cue, forego intentions and default to the path of least resistance duly conducted by your feelings. It may not be optimal — but it is human nature. In a similar vein, by taking the temperature of market sentiment, investors can effectively ignore the noise — the ‘what people are saying they’ll do’ — and use Sentiment Analysis to focus on how people feel to predict the actions they’re most likely to take.

Markets then move accordingly, and investors profit.

Widespread Glee Fuels Growth

Herd mentality is a mainstay of crypto, and there’s perhaps no better example of positive sentiment fuelling market movement than the ‘bubble’ of 2017. Commentators couldn’t quite believe what was happening. Frequently predicting collapse, seasoned participants recognized the disproportionate gains and accumulating riches. In the meantime, novices remained genuinely unsure of what was going on, either getting lucky on a gamble or entering the race so late, they hit a bust — still unsure of what actually happened. Many still consider the reasons behind the gains a mystery. But had you tracked global sentiment, perhaps the story would have been more clear. The market was fuelled by unchecked positivity in the absence of bad news, with more and more people talking about the size of the opportunity. The more we spoke, the more others felt compelled to flock to the party. They profited, spreading the good vibes.

In a self-fulfilling prophecy, optimism poured petrol on the growth.

In a market like cryptocurrency, where there’s near-limitless participation coupled with very limited knowledge — most have little else to act on other than the sentiment of their peers.

Subsequently, booms happen quickly.

Meanwhile, Mass Panic Signals a Sell-off

Then, bad news hits — say, a delayed ETF decision — and while the long-term impacts are arguably negligible, the market enters into free-fall. Why? Because bad news spreads like wildfire, and people become scared. Sentiment turns south — and sell orders appear as if from nowhere. Though it’s unlikely many people truly understand the implications of a Bitcoin ETF, they infer from media reaction that a delayed decision is terrible news, which is enough to send them to the hills — and as during a boom, the flocks duly follow. So, as of the time of writing, we continue to witness a market in descent, even though we expect a favorable ETF decision to arrive eventually, be it later this year or early 2019. But feelings overrule reasoning. Subsequently, we don’t invest even though we acknowledge we should.

Is Sentiment Analysis the Answer?

In short, yes — feelings are the bedrock of decisions. First, we experience the stimulus: we read a news story, see an influential post, witness a market correction. Then, an unfelt emotion arises subconsciously in our brain. The body produces hormones in response, and a domino effect results in a feeling — be it positive or negative — flowing through our veins. It is this subsequent feeling — our subconscious response — which guides our decision-making. And while we maintain some influence over the ultimate direction we choose to take, how our body has responded in the first place remains unpredictable. Our intentions could lean one way, but our emotions could lead us down an entirely different path. Scale this into an emotionally-charged, often volatile market where information is limited, and market movements happen quickly — the domino effect can result in exaggerated, irrational behavior. Irrationality breeds irrationality with dramatic effect.

So, How Do YOU Avoid Sentimental Decisions?

If you have a means of monitoring this burgeoning sentiment, you step into a position of power. Patterns emerge long before feelings turn into decisions. Shrewd investment decisions become based on the seemingly invisible information. It’s as if you’re able to predict the actions of others before they even know what they’re going to do themselves. Coupled with Technical Analysis, you have access to the most sophisticated of crypto-investment armories.