What Is Crypto Market Sentiment and How Does It Work?


Understanding the sentiment of the crypto market is a huge advantage for you as a trader. It helps you aggregate the majority opinion and thoughts on the crypto market, and with such information, you can take advantage of changing market directions.

However, can that crypto market sentiment be used to make accurate crypto trades?

What is market sentiment?

Every trader has an opinion and an explanation of the different market conditions. However, regardless of the trader’s convictions, the market can still move in an unforeseen direction, causing the trader to lose his money. Why is this so? The trading sentiment of an individual, i.e. a retail trader, is not enough to move the market; It is usually a combination of all trading views and opinions, and that combined sentiment is known as market sentiment.

Market sentiment is the general and prevailing attitude and mood of investors towards the crypto market. It is the sum of market opinions. A positive market sentiment indicates a bull market, while a bearish market is a bear market. The combination of the two drives price action, creating short-term and long-term investment opportunities.

Market sentiment is affected by anything, so it is important that you get as much information about the market as possible when doing sentimental analysis. Carrying out sentimental market analysis generally involves a combination of various indicators and market factors, some of which we will consider in this article.

An example of how sentiment affects a market price is Elon Musk’s tweets about Dogecoin in 2021, which caused the price of Doge to skyrocket. His tweets gave many investors more hope in Dogecoin and during that period the price increased dramatically.

How to gauge crypto market sentiment

There is no particular way to measure the market mood and prevailing trading psychology of traders because different factors affect the overall market sentiment. For example, a major glitch or hack on a crypto exchange can cause traders and investors to lose confidence in the market and start withdrawing their investments from other exchanges. Such an event can trigger an unexpected bearish sentiment.

Instead of trying to find an accurate way to gauge market sentiment. You need to get a way to know the views, ideas and thoughts of the different people involved in the crypto market. Some things to watch out for are:

crypto hype

Cryptocurrency hype can affect market sentiment towards a particular cryptocurrency. Such hype can be triggered by an influential person or a major crypto project leader. Sometimes it could be a growing interest in a token. The Elon Musk example we gave earlier is an example of market hype.

One of the ways to gauge the hype surrounding a crypto project is to use Google Trends. A high search volume for a specific cryptocurrency can indicate what many investors think.

You must be up to date with the latest industry news and market happenings from trusted crypto news platforms. A major event, such as a crypto ban in a country with many crypto investors or the failure of a major crypto exchange, can have a negative impact on the market.

News related to a greater acceptance of cryptocurrencies as a payment system in major countries or a large investor choosing to invest heavily in cryptocurrencies could be positive for the market.

social media pages

Checking social media pages to see what community members think of a project is a good way to gauge sentiment around that project. Telegram and Discord have become popular platforms for many cryptocurrency users and investors, and you will also find them useful for gathering information. Some other platforms where you can collect information include Twitter and Reddit.

Using Crypto Market Sentiment Indicators

Using sentiment indicators can also help you aggregate information about market sentiment. The main challenge with this method is that most crypto sentiment indicators are based on Bitcoin. As a result, you may not be able to use this method for a wide range of cryptocurrencies.

2 Bitcoin Market Sentiment Indicators

You can use a combination of different market sentiment indicators to check for bullish or bearish trends in the crypto market. Generally, these indicators represent information in the form of a scale. Let’s consider two indicators you can use to get an idea of ​​the market sentiment for Bitcoin.

1. Bitcoin Fear and Greed Index

This indicator shows the level of fear and greed in Bitcoin on a scale from 0 to 100. Also, the indicator analyzes different information such as market volatility, volume, social media, trends, and dominance.

This indicator attempts to weigh fear and greed in the market. When the price of Bitcoin increases, more investors want to enter for fear of missing out (FOMO). Therefore, many become greedy in the market. On the contrary, when the price of Bitcoin starts to fall, investors want to get out of the trade for fear of losing their money.

A reading of zero on the Bitcoin Greed and Fear Index indicates that the market is in an extreme state of fear, while a reading of 100 shows that the market is in an extreme state of greed.

2. Bullish and bearish index

This indicator analyzes conversations on social networks to show how bullish or bearish they are. A reading of 0 shows extremely bearish sentiment, while 1 indicates extremely bullish sentiment.

The software’s analytics data is based on 93 opinions and topics collected from Reddit, Twitter, and Bitcointalk, and is updated every hour.

Importance of Market Sentiment Analysis

Carrying out sentimental analysis helps you understand how the price is likely to move in the short term. It becomes more convincing when combined with technical analysis and fundamental business metrics. Identifying potential price trends before they even occur in the market puts you in a better position to make the most of the information.

Constantly execute trades resulting from market analysis with general market sentiment, technical indicators and fundamental indicators will give you better results. Combining sentiment analysis with your trading will also help you trade with more confidence and purpose and less emotion.

Sentimental analysis is not enough

You cannot rely solely on sentimental market analysis to execute trades. To be successful, you need to combine sentiment analysis with technical and fundamental analysis. There is also no guarantee that some major events will significantly affect the market price. Therefore, it is difficult to predict the reaction of the market at all times.

The information on this website does not constitute financial, investment or business advice and should not be considered as such. MakeUseOf does not advise on any trading or investment matters and does not advise the buying or selling of any particular cryptocurrency. Always do your own due diligence and consult a licensed financial advisor for investment advice.