Crypto Market Sentiment Analysis Overview

crypto market sentiment

Crypto Market Sentiment Explained. How Emotions can Influence Cryptocurrency Prices.

Many factors influence cryptocurrency prices. Crypto market sentiment analysis helps you evaluate what influences these price movements.

Do you know that if enough traders act with the same idea, it can result in market cycles getting stronger or weakening?

Thoughts and feelings can spread through investors like a virus. When this happens, it can have severe consequences for the price of a cryptocurrency.

Technical and fundamental analyses are great for understanding how the price of an asset will behave. But what about sentiment analysis?

Sentiment analysis is an emerging branch of analytics that seeks to understand how individual points of view can influence the cryptocurrencies value. It doesn’t rely on the quantifiable metrics the way technical and fundamental analysis does.

Instead, sentiment analysis focuses on how specific perspectives can affect the crypto market price.

Market sentiment is what a more significant percentage of traders are thinking or feeling about the market – it is the most critical factor that drives the crypto market. Because many people tend to act based on how they feel and think about specific assets relative to their strength or weakness close to other tokens.

I guess when you trade crypto, you won’t just choose a pair to buy or sell, leaving it up to chance to determine your profit /loss status at the end of a given time. As a newbie to the crypto world, you might be wondering what precisely crypto market sentiment analysis refers to.

Crypto market sentiment refers to the market trend or mass psychology that indicates which direction the market is moving or which trend the market is following at any given time.

Bitcoin is a dominating force in the cryptocurrency world. Experts have found that Bitcoin’s sentiment, or people’s feelings towards Bitcoin, can significantly impact the prices of other cryptocurrencies.

While there are many sentiment analyses and machine-learning algorithmic trading, Gunbot is not a tool for this type of trading.

The crypto trading bot does the opposite (does not rely on feelings), but crypto market sentiment can influence your automated trading outcome.

This article will talk about leveraging market sentiment to assess current market movements and make more profits.

What is Crypto Market Sentiment?

what is crypto market sentiment

Crypto market sentiment embodies the general prevailing emotion of most market participants and explains current market actions and future market share prices. Market sentiment is an excellent way to understand the attitude of traders and investors towards a market or asset.

It’s a general feeling that you can reveal through the overall activity and price movements. If prices rise, it can show that there is a feeling of bullishness. If prices drop, it can mean the sentiment is bearish.

In making informed trading decisions, you as a trader must weigh many factors that could influence the bias of a coin before deciding on the current and future status of specific cryptocurrencies.

It is important to note that crypto market sentiment is based primarily on the emotions of traders, which is one of the most, if not the essential factor in figuring the profit of a trade.

Types of Crypto Market Sentiment

There are many varieties of sentiment in the crypto market, but you should be interested primarily in the bullish and bearish feelings of the crypto market participants.

When a more considerable percentage of the market wants to sell a coin, market sentiment is considered bearish; if the majority want to buy this currency, the market sentiment is bullish.

When most market participants aren’t sure what to do right now, emotion is mixed, and the market stays neutral.

Crypto market sentiment acts like a fickle lover, changing his mind based on new information altering existing beliefs.

At some point, the whole world could buy Bitcoin in anticipation of a more robust market. The next second, anyone could get rid of it, as they are concerned that Bitcoin will dump due to the influence of some new information, which is almost always the big players’ strategy.

Understanding the present market sentiment and utilizing it properly with other strategies can help you maximize your trading profits.

Because if you can guess what other market participants are thinking and understand why the market is moving in a particular direction, you will execute your trading strategy accordingly.

How does Crypto Market Sentiment Work?

Financial markets, such as the crypto market, convey the dominant opinion of traders on the future direction of their assets. Simply put, traders buy because they are optimistic and sell because they are pessimistic.

In general, if everyone were bullish about the crypto market, then the market would not perform well as the market would be out of balance with buyers, and there would be a significant shortage of sellers.

The reverse is valid for the deep bottoms of the market. As the market hits a low, traders are starting to believe that coins will continue to fall and are not expected to reverse anytime soon.

Such a degree of pessimism paves the way for buying opportunities as traders wait for a sign that the worst is over. Therefore, many traders are confused about the sentiment of the market.

Here’s a general guideline to consider when looking at a particular market and thinking about where it is likely to move.

  • Positive sentiment amid positive price action is natural; embrace it.
  • Negative sentiment amid positive price action is counter movement, buy it.
  • Negative sentiment amid adverse price action is neutral, so be it, stay put.
  • Positive sentiment amid adverse price action is countermovement; sell it.

So, what’s the deal with prices?

The fundamentals of the crypto market are irrelevant when it comes to the importance of sentiment.

Ultimately, everything is based on what people think, how they feel, and what they believe.

Sentiment drives supply and demand, which in turn drives the price.

How does sentiment affect trading?

Using sentiment to trade is a game of awareness. You need to be aware of how emotion is changing, so you can change your strategy accordingly.

You also need to know the broader context, fundamentals, and trends.

This way, if sentiment begins to change in one way or another, you can adjust your strategy, taking the information you got into account and using it as your trading edge.

The perfect opportunity for profit lies in a change in the general crypto market sentiment.

How to Perform Crypto Market Sentiment Analysis

how to perform crypto market sentiment analysis

Extremes of market sentiment are essential in identifying trading opportunities.

Once all investors start trading in the same direction, there comes the point of exhaustion where there are no more traders to continue the trend; therefore, the price of the coin pair starts to change direction.

Once the pair’s price starts to reverse, more and more traders will begin to trade in the lines of the new trend. And they will lead the movement until they decide that it is about to change direction.

Whatever strategy you use to trade, you must know the current market sentiment before trading. Understanding the market sentiment can help you deal more profitably.

Social media heavily influences market sentiment, press releases from popular crypto sites like Coin Telegraph, and the community of specific crypto projects.

One of the main factors influencing opinion is official forums. Crypto traders tend to benefit from the activities run by the official communities of the specific project, like engaging in airdrops and so on.

Likewise, social media can have a significant impact on the general sentiment of the crypto market.

Take, for example, Elon Musk’s Twitter effect on Dogecoin. The big players tend to move the market by their pieces on various platforms. It’s your responsibility as a trader to remain focused and analyze the market confidently.

Trading without considering the prevailing market sentiment or trading based on someone’s tweet can cause a lot of damage to your trading account.

Have you heard the expression, buy the rumor, sell the fact?

It is not cliche, and it happens because it’s hard to make an impact when people are already well-informed. News and events are often priced into the market long before they happen, which means the price will move in the opposite direction once profits are taken.

When studying crypto market sentiment and price action, it can be hard to make sense of all the mixed signals. Therefore I will recommend you a trading strategy that follows specific rules to help you deal with confusion.

Learn more about a Gunbot price action strategy here.

Crypto Market Sentiment Indicators

Most traders and investors believe that group psychology plays a vital role in driving the markets. It’s no surprise, then, that many of the most popular indicators used are those designed to anticipate changes in sentiment among traders.

Sentiment indicators help identify investors’ expectations of the market. More commonly used sentiment indicators include the Volatility Index, Bullish/Bearish Index, Fear, Greed Index, etc.

These indicators are all used as counter indicators, which means that they allow traders to know when a market has reached an abnormal condition and predict an imminent reversal.

The philosophy of such a strategy is best described in the classic Wall Street adage that says: “The crowd is right in the trend but wrong in the turns.”

Best Crypto Market Sentiment Indicators

Here’s more information on each of the top sentiment indicators.

Volatility Index

Initially introduced by Robert Whaley in 1993, it is widely used with other financial markets. You can incorporate it into crypto, and It is a description of the estimated (or implied) volatility of a specific coin for a given period. It is often referred to as a “fear index” or “fear indicator.”

Investors in the crypto market use the Index to quantify the estimated daily change in the index and market derivatives. Whenever the volatility index hits a high level, it means that the market is full of worries.

Therefore, for the opposing trader, an exceptionally high volatility index reading is a bullish sign that the market will likely form a low, and you will establish a new uptrend.

In a case where volatility is oddly low, it suggests that the market is becoming complacent and that a bearish reversal may be imminent.

You can check the Bitcoin Volatility Index (BitVol) here.

Bull and Bear Index

The bull/bear index is another effective crypto market sentiment indicator widely used for Bitcoin. It was built by AI innovation—Augmento. It’s based on data collated from forums, price actions, and other relevant market data.

This AI monitors whether the markets are bullish, bearish, or neutral on the crypto assets. The Bull and Bear Ratio, thus, displays the balance between the analysis made.

As mentioned, sentiment indicators are generally employed to recognize overly positive and adverse conditions. A severe bear market typically coincides with market bottoms indicating Zero (0), while extreme bullish typically correlates with market tops indicating One (1)

Social Media

Social media is an excellent source of gauging the crypto market sentiment.

Tweets, Forums, Telegram – all of these things can affect what the markets will do. While you don’t have to be a news fanatic, you have to pay attention to what is happening around you and adjust your positions accordingly.

News events often affect a crypto’s short-term movement, but inner community events can significantly pressure the market.

A great example of significant events affecting market sentiment is China’s ban on initial coin offerings in 2019. When there is a fundamental change of government rules, people can either get very optimistic or scared.

It doesn’t matter your personal beliefs about governance; you need to be aware that governments come into play probably more often than we would like.

One tremendous example is the google trend. You can maximize its functions and look for keywords about some cryptos trending. Do some research about crypto coins and know when to enter the market.

Whale Monitoring

You don’t always want to play “follow the leader,” but remember that volume moves the market direction. If all the fish are swimming upstream, you could be bold and shift the other focus, but that kind of attitude will most likely end in trouble in crypto.

Pay attention to everything and make sure you place trades that will not blow up your portfolio if the worst-case scenario happens.

If you go into every position looking at the worst-case scenario and have a plan that deals with a trade gone wrong, you will come out ahead more often than not and be a very successful trader.

You can follow Whale Alert on Twitter or in Telegram to know when the big players move some crypto money.

Fear and Greed Index

The fear and greed index is a fundamental strategy used to gauge crypto market sentiment. Because ultimately, traders decide the price of assets, and they don’t act logically; their emotions govern them.

In bullish markets, when greed reigns, it pushes prices too high. Conversely, when prices fall, fear is driving the market. When the crypto market gets pushed up or down by these emotions, the price eventually pulls back to align with long-term fundamentals.

Many markets drop when they reach a bullish peak and rise after a bearish dip; it results from traders pumping prices too notably. These sudden price increases are apparent to see on a crypto chart.

Short-term price spikes never last long, and if you learn how to trade them, you can make money out of the greed and fear of other traders.

It is not enough to detect a market ruled by greed and fear and sell it or buy it; you have to know when the tipping point is approaching; that’s the hard part!

The key here is to monitor price dynamics, support, and resistance. First, watch the price form a high or low somehow, then watch for momentum oscillators to time your entry. If you are new to using momentum indicators, you should make it essential to your trading analysis.

Several factors come into play which is weighted differently. In short, you get a number between 0 (fear) and 100 (greed), where 50 is considered neutral.

Suppose you can make this determination and apply this information by executing several different trading strategies to take advantage of the next expected market move. Then you are good to go.

Check out the Crypto Fear and Greed Index
Latest Crypto Fear & Greed Index

Why is Crypto Market Sentiment Analysis Important?

One of the most important things for a crypto trader is to stay up-to-date on all the conversations and feelings in the cryptocurrency market.

Mass sentiment plays a vital role in the development of market peaks and troughs. Typically, a dip in the crypto market forms when most traders are extremely pessimistic, and a market peak occurs when most traders are ultimately optimistic.

With the recent cryptocurrency increase in popularity, social media platforms like Reddit and Twitter are flooded with discussions. You can use these discussions to understand how people feel about the market and make more informed trading decisions.

To stay up-to-date with the crypto world, you should monitor and analyze data in real-time.

This way, you can better understand the public’s expectations, the perception of a particular cryptocurrency, and changes in trends over time. This information is invaluable if you want to stay on top of the crypto market sentiment.

Fear of the unknown can be one of the biggest obstacles and challenges that traders can encounter. Make sure you take advantage of the best sentiment analysis tools you can find on the market to help you make superior trading decisions.

Regardless of been a long-term investor or scalper, you should be prepared for sudden changes in sentiment. For example, if you’re long on Bitcoin, but the mood suddenly shifts (which can happen instantly), you need to reconsider your strategy based on the new market sentiment.

The sentiment is one of the key drivers in the cryptocurrency markets. If you’re aware of these drivers, you can minimize any losses and deal with sudden changes in the collective’s thoughts and feelings.

Trading over small timeframes, especially, requires that you pay attention to crypto sentiment analysis.

Don’t forget the importance of the psychology of the market cycles

wall st market sentiment cheat sheet


Above are detailed explanations of market sentiment analysis and indicators you can use to improve your trading results.

The sentiment of the crypto market is driven mainly by volume. And it is prudent to follow the market sentiment analysis performed by researching each project before trading.

Now that crypto markets are more transparent, there’s a lot of opportunities for investors to leverage the power of crypto sentiment analysis.

The big question is – how reliable is crypto sentiment analysis?

Crypto market sentiment analysis is an excellent tool to use, but it shouldn’t be the only one you rely on. However, appropriately applied, sentiment analysis can provide you with an outstanding complementary view of the market.

By doing crypto sentiment research, you can have the edge over other traders by better understanding the market. The sentiment score provides insight into the market’s prevailing attitude.

When investing, it’s essential to know what’s going on with the market. The crypto market sentiment is a good signal of where the market stands and what direction it is likely to move in. It can help you decide to sell or buy.

While your intuition and standard trading tools can guide you in understanding crypto market trends, combining sentiment analysis with fundamental and technical analysis will give you a clearer understanding of the current price action.

To be on the safe side, learn and use the three most crucial market analysis resources.

market analysis resources

If you want to make it into the crypto trading business, you need to build a severe arsenal of tricks, strategies, and methods.

Never enter a trade unless you’re sure you should be in the transaction. If you cannot do this preliminary analysis and follow your trading plan, the most likely thing is that you will end up losing money.

Suppose you’re new to cryptocurrency trading and are not that knowledgeable about the hangs of things yet. Never begin any actual transaction until such time that you have perfected your new crypto trading strategy.

Remember, there won’t be any guarantees in crypto, and doing all you can to get rid of any risk has to be done.

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If you want to make money in the cryptocurrency market, it is undoubtedly worth considering automated crypto trading. With so many people enjoying the benefits of these systems, they have proven themselves to be a sound investment.

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