The Relationship Between Social Media Sentiment and Cryptocurrency Price Movements

Cryptocurrency is the most discussed financial issue in the world today. The crypto market is significantly impacted by online discussions unlike the traditional markets like stocks or bonds.

The role of social media platforms such as Twitter (X), Telegram, Reddit, YouTube and Tik Tok in directing how the populace perceive cryptocurrencies is very high. These emotions are referred to as social media sentiment, which usually influences the price movement of cryptocurrencies. Put simply, words and emotions of people online can drive prices up or down.

Social media sentiment is the overall mood or the opinion that people are displaying towards a given cryptocurrency. This disposition may be either positive, negative or neutral. The positive sentiment is when individuals are phased, optimistic, or assured of a coin. When individuals fear, are angry or sceptical, the mood is negative.

Due to the high amount of time that crypto investors spend online, these emotions are spread quite quickly and affect nearly instant decision-making.

The whole concept of the crypto market is one of the greatest causes of the immense power of social media on the prices of cryptocurrencies. Crypto markets are 24 hours and anyone can use them. It has no closing hours, and few strict rules as in the case of the traditional financial markets.

This makes crypto highly sensitive to the news, rumors and internet discussions. The post made by a well-known influencer on Twitter can reach millions of users in several minutes and trigger an immediate change in price.

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My personal experience has shown that when Twitter or Telegram is positively hyped about something, people will beat a frenzy to purchase it without thoroughly researching. This influx in purchase pressure can usually result in a sudden price hike.

This is commonly called “pump.” But once negative news or fear strikes, everybody becomes panicking and begins to sell out resulting in the price declining, or as it is commonly said, dump. These emotional responses demonstrate the strength of social media feeling in the crypto world.

The other key element is the role of opinion leaders and influencers. Influencers are those people with followings of their large size and who have established trust with their followers. Such individuals who advocate or criticize a cryptocurrency tend to have their followers follow them.

An illustration of this is when a celebrity openly endorses a coin, individuals will see it as an act of trust and possible gains. Conversely, fear is transmitted fast, and the prices are dropped when the influencers issue the warning about scams or failures.

The sentiment of Fear of Missing Out (FOMO) also correlates with the change in the crypto price significantly with social media. By witnessing others who are posting profits or stories of success, people have the feeling that they are being pressured to get in before it is too late.

This emotional reaction makes most people purchase at high prices driving the market high. Unfortunately, it is after euphoria that the prices tend to plummet and those who end up buying it late lose money. In my opinion, this emotional cycle is among the largest factors that contribute to crypto prices being highly volatile.

The negative sentiment is as effective as the positive sentiment. True or fake bad news travels at a very rapid pace on the social media. Fear and uncertainty could be caused by news on government regulations, hacks on exchanges, or project failure. When this occurs, most investors are quick to sell so as to save their funds.

This quantity selling will lead to abrupt lowering of prices. It may happen that even unproven rumors can have a negative effect on prices just because people believe and act on emotions.

The sentiment analysis of the social media has now become a significant tool among traders and analysts. Sentiment analysis is the analysis of posts, comments, likes, and hashtags that are used to learn the overall mood in the market.

This information is used by some investors in estimating the short-term trends of prices. When the sentiment is mainly optimistic, they expect the prices to increase. When feeling becomes negative they get ready to fall. Nevertheless, this practice is not necessarily true due to sudden change in emotions.

Social media sentiment is not the only variable that influences the cryptocurrency prices, although it does play a significant role in this. The demand in the market, the advancement of technology, the government policies, and the world economic environment are other influential factors.

In other cases the prices are moving contrary to online sentiment. This reveals that social media cannot be the sole source of making investment decisions. I believe that a significant threat of excessive use of social media sentiment is

manipulation. There are certain groups that deliberately propagate false information so as to manipulate prices to their advantage. This usually happens in the pump and dump scheme where individuals generate artificial hype which makes them sell to buyers at a high price at the expense of others who make losses. This renders it extremely critical regarding the investors to think and check on information.

Finally, social media sentiment has a high correlation with price dynamics of cryptocurrencies. When sentiment is positive, it results in an upward movement in price whereas when it is negative, a downward movement is observed in price. Fear, excitement, and greed are feelings that go viral and have an impact on how investors act.

Although social media may be an effective source of information, it is to be employed sparingly. In my opinion, awareness of social media with the appropriate research and discipline would be the most effective means of surviving and succeeding in the cryptocurrency market.