“Economists think about what people ought to do. Psychologists watch what they actually do.”
Since prices reflect what people actually do, behavioral economics can help us spot opportunities. One important phenomenon in behavioral economics is the availability heuristic.
The availability heuristic is a mental shortcut that relies on immediate examples that come to a person's mind when evaluating a specific topic, concept, method or decision. If everyone around you is bullish, you will probably be more receptive to positive news and analyses, causing you to act sooner on the sentiment. Most people get their exposure to news and therefore their availability heuristic through either;
- Other people
- The internet
In our previous post we talked about how the AltcoinAnalytics bot (http://t.me/Crypto_sentiment_bot) measures (and shares) sentiment. Now we have added another feature that measures sentiment on the internet.
How it works
News on crypto is plentiful with news sites, blogs and forums all getting in on the act. At AltcoinAnalytics we have been gathering all this news in an extensive database, which then can be analyzed for whether a message is positive or negative ( taking in to account crypto terminology, eg, lambo, moon or FOMO).
We can classify headlines as either positive or negative, and see the ratio between the two. If the web is filled with negative news it will likely subconsciously influence the sentiment of the entire community.
The current results
The plot below shows the analysis described in the previous paragraph. In total 15000+ headlines are analyzed. The bottom red and green line show the negative and positive headlines as percentagea of the total headlines. The top green line shows the ratio between positive and negative headlines. The dotted line shows the Bitcoin price.
Notice how the ratio of positive to negative headlines drops before prices drop. The reverse is not true however: an increase in positive news doesn’t seem to affect prices. This is in line with general intuition that people seem to react more to negative news than to positive news.
This information clearly has substantial value in deciding on whether to enter or exit the market, and to gauge the overall sentiment.
Where will it head?
Currently we see a ratio of 1 with respect to negative and positive headlines, implying there are as many positive headlines as there are negative headlines. It will be interesting to monitor when and if this will go up or down and whether prices will follow.
The graph is updated on our chatbot, which is free to use. Add http://t.me/Crypto_sentiment_bot on Telegram and send /news in other to see the graph evolve over time.