The Defy Method: Understanding the Crypto Market with Sentiment Analysis and Data Analytics

What is Sentiment Analysis?

At Defy Trends, our specialty is gathering and analyzing data from both on- and off-chain sources. Notably, we use data from social media websites and elsewhere on the web to generate the best insights into where cryptocurrency markets are going. One of the most important tools in our arsenal is sentiment analysis, and this article will explain some basics of how we use sentiment analysis to identify patterns and trends in the DeFi market data.

Sentiment analysis is a type of natural language processing used to identify and quantify the emotional or affective content of texts. More simply put, sentiment analysis uses advanced tools from data science to understand how people feel about the things they’re writing about online.

If you measure that there were 10,000 tweets yesterday about Solana, it doesn’t tell you that much about how people feel about it. And analyzing the sentiment of each tweet is time-consuming and subjective.

Sentiment analysis helps us to analyze textual data points and decide whether the text data we have collected represents positive, negative, or neutral opinions — and the relative proportions of each. For this reason, sentiment analysis is sometimes called opinion mining. When used in the analysis of cryptocurrency markets, sentiment analysis can be used to analyze — and make predictions about — price trends and movement patterns.

While sentiment analysis sees wide-ranging use in the advertising and product marketing industries — for example, mining product reviews for overall opinion trends — its use as a predictive tool in the crypto space is advantageous because of how susceptible crypto prices are to social media hype.

Sentiment Analysis in Cryptocurrency Markets

Mining social media and news sources for crypto sentiment allows us to look at a massive number of data points. A popular product on Amazon might have tens of thousands of reviews, but even that amount of text is dwarfed by the amount of text in crypto-related tweets, Reddit posts and comments, Discord chats, Facebook groups… the list goes on.

And while the prudent crypto investor can and should stay on top of the ongoing crypto social media conversation, it’s impossible for a human to ingest the sheer volume of data that our processes and algorithms can while running 24/7.

So how does it work?

Our processes scrape websites for conversations based on keywords, paying special attention to established crypto spaces such as certain subreddits or crypto-focused Twitter accounts. The text from these posts is parsed and organized based on the text meta-data (such as the time and date of the post) and then our natural language processing (NLP) tools analyze syntax, sentence structure, and morphology.

Once NLP is done, posts can be assigned numeric values based on what our algorithm predicts is the opinion. The most basic form of numeric assignment would assign 1 to a positive post, and -1 to a negative post. This stage allows for spot-checking — if a post appears negative to a human but the system thinks it is positive we can find out where that assumption came from and tune the system for subsequent analyses.

With numeric values assigned to specific posts, we can quantify how much positive sentiment is being generated for a particular cryptocurrency, and how well that sentiment correlates to price action. A variety of techniques such as linear regression can verify the statistical significance of this correlation and rule out with relative certainty the possibility that sentiment and price action are only correlated through random chance.

This article seeks to provide a basic explanation of these concepts, but there are a lot more moving parts and challenges to analyzing massive troves of social media data with sentiment analysis. Our next Medium post will dive deeper into the complex and fascinating world of sentiment analysis.

At Defy, we are committed to giving you the education and tools needed to navigate the exciting world of cryptocurrency investing. Follow us here on Medium and on Twitter to read more articles like this, and make sure to subscribe to our newsletter for the latest updates about the Defy platform that will be introduced later this quarter.

About Defy Trends

Defy Trends is an intuitive, all-in-one crypto and NFT intelligence platform that empowers individual and institutional investors to make confident data-backed investment decisions. The Defy Trends platform includes sentiment analysis, the Defy Trends Score news aggregation, on-chain analysis, AI forecasts, in-depth educational materials, and crowd-sourced research. Learn more about Defy Trends

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