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Cryptocurrency market sentiment: what it is and what it is used for
Psychology of a Market Cycle
Cryptocurrency
15.09.2021
Updated 11.03.2022
6:46

The market sentiment stands for the attitude, opinions, and intentions of investors regarding a specific asset. This indicator is not necessarily based on precise calculations or predictions, but it often affects the final price significantly.
Due to the analysis of market relations, it’s possible to conduct a range of researches that will point to the possible price of the product. Besides that, it also defines the levels of interest in the asset as well as levels of fear of potential investors.

Introduction

Cryptocurrency, as any other currency in the market, is connected to the terms of supply and demand. Many factors may change this indicator: starting from unsuccessful deals of a group of investors to a negative opinion about the cryptocurrency in news or society. While the analysis allows to track the perspectives and define the terms. One currency may be of interest only in the short-term run, and others will show the bigger potential much later.

Together with primary technical analysis, the market sentiment may help a trader a lot. He will be able to develop a strategy without worrying about significant risks.

Market sentiment. What is that?  

To put it simply, market sentiment is the attitude of investors and traders to a specific asset or financial market. The concept is relevant for any financial market, including a cryptocurrency one. It helps to figure out the main sentiments and define whether that or another asset should be chosen for trading or not.

However, it’s worth remembering that even the most positive predictions do not always result in high profits. That is how a concept of a bear market emerges. A short-term rise of a cryptocurrency in the market may bring only a small profit, and in the long run, the asset won’t bring even half of its initial ‘rise’.

Using the following analysis, traders may:

  1. Track the market demand and see what is worth attention and what is not.
  2. Study the potential of that or another asset.
  3. Predict the market condition for a specific time frame.

As an example, we can mention the recent situation with Dogecoin. The excessive popularity of the cryptocurrency was caused by statements made by famous people on social media. Many purchased Dogecoin at that point without fundamental analysis or market sentiment check in the long term perspective. Everything happened due to a change of public opinion triggered by several messages on Twitter. How profitable is an investment like that? It’s not possible to say that Dogecoin will remain TOP 20 in the long run. And that is what experts and large investors have already told about several times.

Importance of market sentiment analysis

It’s impossible to build an optimal strategy without this analysis. The minimal development of efficient strategy creation includes sentiment analysis, as well as technical and fundamental analysis. Thanks to them, it becomes possible to assess the available information, factors, and conditions and make the best decision later on.

To provide an example, let’s take an indicator of FOMO (Fear Of Missing Out). Using the market sentiment analysis, you can define precisely whether this fear is real and it should be taken into account, or whether it’s simply caused by a public outcry. In addition, the use of several types of market analysis will allow to:

How is market sentiment analysis conducted? 

To define the sentiments of a financial market, it is required to find out the opinions of its direct participants. We also recommend relying on your experience, knowledge, and other types of analysis. In this case, the final result will be complete.

How is it possible to find out the opinions of the market participants?

  1. You can do that by studying the pages on social media, blogs of well-known experts, traders, and investors. It’s quite common that they leave their opinion on their pages, which, in turn, also affects price formation.
  2. To find the channels of the project participants in messengers. It will allow getting to know not only their opinion but directly evaluate their experience, too.
  3. Study the groups of less influential traders, use the statistics, and existing surveys. With the help of them, you will be able to cover a larger audience during the analysis.
  4. Analyze the latest cryptocurrency-related news by entering the names of cryptocurrencies and exchanges into the search bar.
  5. Monitor the transactions of large investors. News about such operations usually spread well and are available to the public, which allows evaluating the market sentiment. Also, you may configure specialized bots in Telegram and on Twitter that will instantly notify you about the conducted deals.
  6. Using the tool called Google Trends, you may track the interest level to that or another cryptocurrency. The most frequent queries regarding a specific cryptocurrency may tell you a lot about the market condition.

We told you about the main aspects that you should take into account during the analysis. It’s essential to trust official sources. You shouldn’t trust fraudsters and surely, shouldn’t make any questionable deals with them. When conducting the analysis, you must remain critical not only of others but of yourself as well.

Sentiment indicators 

Using the indicator of market sentiment in your calculations, you can understand which trends regarding the market or asset are relevant today. It’s shown in the form of a chart or scale. It should be noted that the building of the market analysis shouldn’t be limited by this tool only. The more information is collected, the better. Specialists advise using several indicators at once to contribute to the completeness of the analysis.

The majority of indicators in the cryptocurrency market are intended for the Bitcoin status analysis. But finding other indicators for various currencies is possible as well. For example, for Ethereum (ETH). One of the most popular indicators can be called the ‘fear and greed index’. It represents the level of greed and fear of financial market participants on a scale of 0 to 100. To calculate the index, the following sources of information are involved:

One more actual index for Bitcoin is Bull & Bear. Using AI, up to 94 sentiment indicators and topics are calculated on the most popular platforms, such as Twitter, Reddit, Bitcointalk.

Conclusion

It’s impossible to develop an optimal strategy without a good analysis of cryptocurrency market information, sentiments and trends. Using the market sentiment analysis, traders may understand the attitude of other participants to an asset. This will allow to make a profitable deal and will prevent from losing money in the future.