What is Crypto Market Sentiment and how does it work?

Understanding the sentiment of the crypto market is a huge plus for you as a trader. It helps you gather the majority opinion and thoughts about the crypto market, and with such information you can take advantage of the market’s changing directions. However, can that crypto market sentiment be used to make accurate crypto trades?

What is market sentiment?

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

Market sentiment is investors’ overall and prevailing attitude and mood towards the crypto market. This is the summary of the market views. A positive market sentiment indicates a bull market, while a pessimistic market is a bear market. The combination of the two drives price action and creates short-term and long-term investment opportunities.

Market sentiment is affected by anything and everything, which makes it important that you get as much information about the market as possible when doing a sentiment analysis. Conducting sentimental market analysis usually 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 rise. His tweets gave many investors more hope in Dogecoin, and during that period the price rose dramatically.

How to Measure Crypto Market Sentiment

There is no specific way to measure the market mood and traders’ prevailing trading psychology because different factors influence the general market sentiment. For example, a major crypto exchange crash or hack can cause traders and investors to lose confidence in the market and start withdrawing their investments from other exchanges. Such an event can cause an unexpected bearish sentiment.

Instead of trying to find a precise way to measure market sentiment. You need to find a way to know the views, ideas and thoughts of different people involved in the crypto market. Some things to look out for are:

Crypto hype

Crypto hype can affect market sentiment towards a particular cryptocurrency. Such hype can be caused by an influencer or major crypto project leader. Sometimes it can be an increasing interest in a sign. The Elon Musk example we gave earlier is an example of market hype.

One of the ways to measure the hype surrounding a crypto project is to use Google Trends. A high search volume for a particular cryptocurrency can indicate what many investors are thinking.

Crypto related news

You need to be updated with the latest industry news and market happenings from trusted crypto news platforms. A major event, such as the banning of crypto in a country with many crypto investors or the failure of a major crypto exchange, can negatively impact the market.

News related to an increased adoption of cryptocurrency as a payment system in major countries or a major investor choosing to invest heavily in crypto can be positive for the market.

Social media pages

Checking social media pages to see what a project’s community members think about it is a good way to gauge the sentiment around such a project. Telegram and Discord have become popular platforms for many crypto 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.

Use Crypto Market Sentiment Indicators

Using sentiment indicators can also help you gather market sentiment information. The big challenge with this method is that most crypto sentiment indicators are based on Bitcoin. Because of this, 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. Typically, these indicators represent information in the form of a scale. Let’s look at two indicators you can use to get an idea of ​​Bitcoin market sentiment.

1. Bitcoin Fear and Greed Index

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

This indicator attempts to balance fear and greed in the market. When Bitcoin’s price rises, more investors want to get in for fear of missing out (FOMO). So, many get greedy in the market. Conversely, when the Bitcoin price starts to fall, investors want to get out of the trade for fear of losing their money.

A reading of zero on the Bitcoin Fear and Greed 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. Bull and Bear Index

This indicator analyzes social media conversations to show how bullish or bearish they are. A reading of 0 indicates extremely bearish sentiment, while one indicates extremely bullish sentiment.

The software analyzes data based on 93 sentiments and topics obtained from Reddit, Twitter and Bitcointalk, and it is updated every hour.

Importance of market sentiment analysis

Performing a sentiment analysis helps you understand how the price is likely to move in the short term. It becomes more compelling when combined with technical analysis and fundamental trading statistics. 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 executing trades that result from analyzing the market with general market sentiment, technical indicators and fundamental indicators will give you better results. Combining sentiment analysis with your trades will also help you trade with more confidence and purpose and less emotion.

Sentimental analysis is not enough

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