Many factors influence the formation of digital currency rates. Fundamental events exert pressure on the entire market. History shows that the main movements of quotations occurred against the news background. They changed market sentiment, which led to an increase or decrease in demand for assets. However, the motto “Do not trade on emotions” is the golden rule of the trader. Fear and greed, regret, euphoria, despair, and other emotions are the way to collapse. But is it possible to trade based on the moods of other people? To answer this question, we will deep dive into the market sentiment concept and its analysis.
What Is Market Sentiment?
Market sentiment refers to the general attitude of traders towards a particular digital asset or crypto market. This is the feeling or tone of the market or its herd psychology, manifested in the activity and price movement of cryptocurrencies. Rising prices generally indicate bullish market sentiment, while falling prices indicate bearish sentiment.
It is quite evident that if you learn to correctly assess the level of optimism and pessimism of investors and traders in the market, you can make good money on this. For example, when bullish sentiment prevails in the market, most market participants have either already opened or are preparing to open long positions because they believe the asset price will continue to rise. Accordingly, when bears dominate the market, most market participants have either already opened or are preparing to open short positions because they believe the asset price will decrease.
However, as you understand, there is no situation in the market where all players are bulls or bears. Therefore, at the first signs of extremely bullish or bearish sentiment, a trader should consider opening a position in anticipation of a trend change. A market reversal usually occurs at times when the majority of financial analysts and expert opinions (60% or more) are bullish or bearish. In other words, it is at the moment when the overwhelming majority of market participants have recognized the presence of a trend and want to join it, and a reversal occurs.
On the other hand, as you know, most of the time, the market is in a state of consolidation or a weakly expressed bullish or bearish trend. In such market situations, the trading tactic is to identify a more substantial group of players (bulls or bears), join it, and trade under the rules of your strategy in the direction of the dominant trend. Thus, to understand what impact the market can have on the digital asset, it is necessary to determine the general market sentiment.
What Influences the Market Sentiment?
The price of digital currencies changes under the influence of the mood of traders and investors. They are the ones who make decisions about buying and selling assets. The actions of the cryptocurrency community are primarily influenced by public statements of well-known individuals, banks, companies, and so on. Often, changes in the value of digital assets are caused as a result of FOMO. A positive market sentiment generates demand. And the increased desire of people to buy pushes the rate up. Most of the significant drops are due to bad news about cryptocurrency.
Probably, you have heard well how the statements of politicians, the powerful, and famous traders (and many others) affect the price movement. Even a tweet can cause panic and influence users. So, for example, it is enough to recall the Dogecoin success story. Many traders bought DOGE tokens without any technical or fundamental analysis of the project simply because of the hype that arose from Elon Musk’s tweet. Many crypto companies successfully use tools such as social media to promote their projects and create positive sentiment. Some, such as Shiba Inu, have also become popular as a result of demand from social media hype.
At the same time, it should be noted that positive market sentiment is not always a sign of a price increase, and a negative one is not always a sign of a decrease. For example, coins such as IOTA tend to increase in price every time negative news comes out about them. One possible explanation for IOTA’s insensitivity to news is that its community stubbornly increases purchases during times of crisis to demonstrate its disagreement.
How to Understand the Market Sentiment?
To understand what sentiment prevails in the crypto market, you need to collect and analyze the opinions of market participants. The easiest way to get a basic idea of the market sentiment is to visit the social media of the projects you are interested in. To date, social media has become the main tool for promoting crypto projects. On Twitter, Telegram, Reddit, Discord, etc., the project’s founders write about upcoming updates and partnerships, announce airdrops, and so on. Users in cryptocurrency groups tend to share their opinions, views, and concerns. However, be careful when you open the group page and read thousands of good stories and not a single bad word. This is the main indicator of a scam. It is also necessary to distinguish between irrational sentiments formed at the top of trends. It is worth paying attention only to those crowd preferences that have formed at the bottom of the market. We all remember how many traders bought Bitcoin at the maximum price on the wave of hype and subsequently suffered serious losses.
In addition to analyzing the opinions expressed on social media, you can also use sentiment indexes. Now there are quite a lot of sentiment indices:
- Among the best is Crypto Fear&Greed Index. The index allows you to measure how much the market is currently set up to buy or sell an asset (major assets such as Bitcoin, Ethereum, and others are supported). For example, if the market is “greedy,” it is potentially ready for a correction. On the other hand, if the market is characterized by “fear,” you should consider buying an asset.
- The Bull&Bear Index is another example. The following index collects data from social media, such as Twitter, Reddit, and BitcoinTalk. The service uses artificial intelligence to analyze data by 93 sentiments and topics and displays Sentiment Score. If the Sentiment Score is zero, social media users are in a bearish mood; if the score is one, users are bullish.
- Look at the IntoTheBlock, an aggregator displaying up-to-date and detailed information about the Bitcoin market. The service shows the percentages of different categories of holders, the share of large holders, and the volume of large transactions. Based on several dozen criteria, the service determines whether bulls or bears dominate the market.
- Another popular resource is Google Trends. Using this service is simple. First, you need to enter a query of interest in the search bar, for example, “metaverse crypto.” After that, the service will display a graph with information about the dynamics of the query in the Google search engine, its popularity in various regions, and the seasonality of demand. The service also displays the top of the most popular and trending queries.
- In addition, you can track “whales” transactions. These traders often act professionally and choose tactics with the least risk of losses. Therefore, if whales suddenly sell off assets, it causes a negative market sentiment. If they buy — a positive one. You can join free Whale Alert Twitter and Telegram communities to track whale transactions in real-time.
- You can also use the well-known CoinMarketCap service to study the price predictions of users. The service collects and averages the price predictions of platform users, so you can find out what sentiment prevails in the market.
Even though market sentiment analysis is one of the most important when making decisions, it should not be used alone. Positive market sentiment is not always accompanied by a price increase, just like a negative one. In addition to tracking social media, news background, and indicators, successful investment decisions are supported by technical and fundamental analysis. Therefore, in any case, DYOR and do not rely solely on the herd mentality.