Dang Quan Vuong is a trader and market analyst at King Stock Capital Management.
Potential new investors recently joining the Bitcoin network have expressed social interest in the asset. Whether you’re selling or buying bitcoin, your actions inherently have an impact on whale behavior. In this article, we will focus on how social sentiment influences whale behavior and how it is linked to price volatility.
When we look at social volume (particularly the sum of content that mentions Bitcoin-related terms at least once on Reddit, Twitter, and Telegram), we can see that social volume and bitcoin price are positively correlated. So what exactly is the rationale for this phenomenon?
Social volume AI is linked to bitcoin price. (source)
Active Telegram users are also associated with bitcoin’s price. (source)
Accordingly, Google Trend data shows that increasing social volume has aroused public interest and prompted them to conduct their own searches for bitcoin. It shows that the amount of bitcoin mentions and testimonials on social media is tied to the public interest in bitcoin and may have influenced the public’s investment decisions.
Google trends are linked to social volume. (source)
Social sentiment has an impact on overall network activity, as evidenced by the number of unique active addresses and transaction volume. The daily cumulative number of unique addresses, including senders and recipients, is proportional to social volume, although there is a significant difference when bitcoin is near the bottom.
The relationship between daily active addresses and bitcoin price. (source)
Similarly, as market participants become more active during a bottom-up trend, the total amount of bitcoin sent over the network in a given range usually increases, while it remains relatively low during a downtrend.
The increase in trading volume indicates that the market is more active. (source)
Trading volume directly reflects bitcoin price as a result of increased activity, and investors are more aggressive during bull runs and less aggressive during bear markets.
Higher volume in an uptrend and lower volume in a downtrend. (source)
In social psychology, the snowball effect is a process that begins with a small situation and grows in importance or size. The vivid depiction is of a snowball rolling down a snow-covered mountainside, collecting additional snow, gaining more weight and momentum until it finally comes to a stop. The spread of bitcoin on various social media platforms could have a similar effect, as more attention is paid to it and it causes bitcoin to gain more public awareness, resulting in a snowball effect. The higher the Bitcoin price, the more publicity it gets, 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 influence the price of bitcoin. They go to buy Bitcoin and are faced with stimulating content from social media. This will draw more attention to the positive aspects of Bitcoin and make more people aware of it. The enthusiasm grows as more individuals enter the market. More and more people are getting involved as a result of increased attention, and the cycle continues over and over.
The market continues to rise until it reaches a critical point where it remains in a state of equilibrium and no longer rises due to the lack of buying momentum. This is because declining social interest marks the maximum upward momentum and the beginning of a downtrend after that.
Whales, as many know, play a very important role in market movement as they have the ability to drive the price of bitcoin, so it is important to determine when they will enter the market. As shown in the figures below, the total number of whale transactions over $100,000 and $1 million rises on the rally and falls on the decline. Charts show that whales are more active in uptrends and less active in downtrends, excluding panic selling in the COVID-19 pandemic.
Whale transactions above $100,000 are usually a sign of an initiating upward move. (source)
Whale transactions over $1 million often result in a return. (source)
In a given time period, the ratio of total coins transferred in profit to total coins transferred in loss grows in uptrends and decreases in downtrends. This means that during the rise, the profit increases until it reaches the top. Then, most traders go down until it turns red, at which point the trend reverses.
The P/L of daily trades is near the highest near the top and the lowest near the bottom. (source)
In summary, the premise of the rising momentum is the increased social sentiment as new investors enter the market eagerly. This self-fulfilling prophecy has historically been attributed to acceleration in transaction volume. When the Bitcoin community thinks the market is going to rise in an uptrend, more buy orders are placed, causing the market to move upwards. Meanwhile, the whales are likely to distribute their assets to the newcomers before forcing them to sell at a loss after a while. As a result of increased public interest, the network value expands until there is no longer any buying momentum, and then bitcoin is eventually abandoned. This cycle is set to repeat itself periodically.
This is Dang Quan Vuong’s guest post. The opinions expressed are their own and may not necessarily reflect the views of BTC Inc. or Bitcoin Magazine.