What is the sentiment of the crypto market?

TL; DR

Market sentiment considers investors’ thoughts, feelings and moods regarding an asset. These sentiments do not always reflect an asset or project’s fundamentals, but can significantly affect the price.

Market sentiment analysis is a form of research that uses this information to try to predict price movements. By tracking the market dynamics with its participants’ overall attitudes, you can understand the amount of hype or fear surrounding a particular cryptocurrency.

Introduction

Just like other assets, the price of a cryptocurrency is directly related to market supply and demand. These market forces can change for a variety of reasons, including public opinion, the press, and social media.

Many traders analyze market sentiment to predict the short- and medium-term potential of a crypto-asset. Along with technical and fundamental analysis, examining crypto market sentiment can be a valuable addition to a trader’s toolkit.

What is market sentiment?

Market sentiment is the collective attitude of traders and investors towards a financial asset or market. The concept exists in all financial markets, including cryptocurrencies. Market sentiment does have the power to influence market cycles.

Yet favorable market sentiment does not always lead to positive market conditions. Sometimes, strong positive sentiment (it goes to the moon!) can precede a market correction or even a bearish market.

In addition to providing insights into market demand, traders can analyze these sentiments to predict potentially profitable trends. Market sentiment does not always factor into a project’s fundamentals, but they can sometimes be linked.

Let’s take Dogecoin as an example. Much of Dogecoin’s demand in its bull run likely came from social media hype (which led to positive market sentiment). Many traders and investors bought Dogecoin without considering the project’s tokenomics or goals, but only because of the current market sentiment. Even a single tweet from a figure like Elon Musk is sometimes enough to trigger positive or negative market sentiment.

Why is market sentiment analysis important?

Market sentiment analysis is an essential part of many trading strategies. As technical or fundamental analysisit is usually a good idea to make decisions using a mixture of all the available information.

For example, market sentiment analysis can help you investigate whether FOMO is justified or simply a result of herd mentality. In general, combining technical and fundamental analysis with market sentiment studies allows you to:

Get a better idea of ​​short and medium term price action.

Develop better control over your emotional state.

Discover potentially profitable opportunities.

How to perform market sentiment analysis

To understand the market’s sentiment, you will need to collect the market participants’ views, ideas and opinions. Again, while this can be useful, don’t rely solely on market sentiment analysis. Rather, you can use the information gathered in combination with your existing knowledge and experience before drawing actionable conclusions.

To get a basic feel, you might consider researching the relevant social media pages and channels to understand what the community and investors feel about that particular project. You can also join official forums, Discord servers or Telegram groups to talk directly with the project’s team and community members. But be careful! There are many scammers in those groups. Don’t trust random people, and make sure that do your own research before taking risks.

Social channels are just the first step. You can use many methods to get a broad view of market sentiment. In addition to monitoring social channels (especially Twitter, given its popularity among cryptocurrency fans), you can consider the following:

1. Track social mentions with data collection software tools.

2. Keep up to date with the latest industry news through media portals and blogs. Binance Blog, Binance NewsBitcoin Magazine, CoinDesk and CoinTelegraph are some examples.

3. Set alerts or track large transactions that occur through whales. These movements are frequently tracked by some crypto investors and can sometimes impact market sentiment. You can find free whale alert bots on Telegram and Twitter.

4. Check market sentiment indicators and price signals on CoinMarketCap. These indices analyze a range of different sources and provide easy summaries of current market sentiment.

5. Measure the level of hype around a cryptocurrency with Google Trends. For example, a large search volume for “How to sell crypto,” may indicate that the market sentiment is negative.

Market sentiment indicators

Investors can look at market sentiment indicators to get an idea of ​​the bullish or clumsy sense of a market or asset. Indicators represent these feelings either graphically or with some kind of scale. These tools can be part of your sentiment analysis kit, but should not be relied upon exclusively. It is best practice to use multiple indicators to get a more balanced view of the market.

Most market sentiment indicators are focused on Bitcoin (BTC), but you can also find Ethereum (ETH) sentiment indices. The Bitcoin Crypto Fear & Greed Index is perhaps the best known indicator of crypto market sentiment. The index shows Bitcoin market fear or greed on a scale of zero to 100 by analyzing five different sources of information: volatility, market volume, social media, dominance and trends.

The Bull & Bear Index by Augmento is another sentiment indicator that focuses on social media. An artificial intelligence (AI) software analyzes 93 sentiments and topics using conversations on Twitter, Reddit and Bitcointalk. The creators also test their indicator’s methodology with the year’s data available. Zero is extremely bearish on the scale and one is extremely bearish.

To put it all together

Analyzing social media channels, on-chain metrics, and other crypto indicators can provide insight into the sentiment of a coin or project. With a better understanding of the market’s current attitudes, you are more likely to make better trading or investment decisions.

To help maximize the effectiveness of sentiment analysis, it’s usually best to combine it with:

Technical analysis – can help you make better predictions when it comes to short-term price action.

Fundamental analysis – to determine whether controversial information is justified or to evaluate a coin’s long-term potential.

Concluding thoughts

While many traders use market sentiment analysis in investment markets, it can be especially useful in the cryptocurrency market. Because the blockchain industry and crypto markets are still relatively small, public perceptions and sentiment can cause volatile price fluctuations.

By using the methods discussed, you can begin to understand market sentiment and (hopefully) make better investment choices. Again, if you want to get started with market sentiment analysis, you might consider:

Track social media channels and the emotions around a project.

Stay up to date with the latest industry news and upcoming events.

Use indicators that help you get a better idea of ​​the public interest on a particular coin.

Market sentiment analysis tends to provide better results with more practice and experience, but it may not work in some cases. Be sure to do your due diligence before trading or investing because every decision involves a certain amount of risk.

Further reading