Understanding the sentiment of the cryptocurrency market is a huge advantage for you as a trader. It helps you to gather the opinions and ideas of the majority about the crypto market, and with such information, you can take advantage of the changing market trends.
However, can crypto market sentiment be used to make accurate crypto trades?
What is the market sentiment?
Each trader has an opinion and an explanation of different market conditions. However, regardless of a trader’s convictions, the market can still move in an unexpected direction, causing the trader to lose money. Why is it so? Individual’s business sentiment, i.e., retailer’s business sentiment is not sufficient to move the market; It is usually a mixture of all trade views and opinions, and this common sentiment is known as market sentiment.
Market sentiment is the prevailing general investor attitude and mood towards the cryptocurrency market. It is the sum of market opinions. Positive market sentiment indicates a bullish market, while a pessimistic market is bearish. The combination of the two drives price action, creating both 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 an emotional analysis. Conducting an emotional market analysis usually involves a combination of different indicators and market factors, some of which we will look at in this article.
An example of how sentiment affects the market price are Elon Musk’s tweets about Dogecoin in 2021, which made the price of Doge soar. His tweets gave a lot of hope to many investors in Dogecoin, and during that time, the price skyrocketed.
How to measure cryptocurrency market sentiment
There is no particular way to measure the market mood and prevailing trading psychology of traders because various factors influence the general market sentiment. For example, a crash in a cryptocurrency exchange or a major hack could cause traders and investors to lose faith in the market and start withdrawing their investments from other exchanges. Such an occurrence can lead to an unexpected downtrend.
Instead of trying to find an accurate way to measure market sentiment. You should get a way to know the opinions, thoughts and ideas of different people involved in the crypto market. Some of the things you should look for are:
Encoder noise
Crypto hype can affect market sentiment towards a particular cryptocurrency. This noise can be made by an influencer or the leader of a major crypto project. Sometimes there may be an increased interest in the token. The Elon Musk example we provided earlier is an example of market noise.
One way to measure the hype surrounding a crypto project is to use Google Trends. The high volume of searches for a particular cryptocurrency can indicate what many investors think.
Cryptocurrency related news
You need to be up to date with the latest industry news and market events from trusted crypto news platforms. A major event such as a crypto ban in a country with many crypto investors or the failure of one of the major cryptocurrency exchanges can have a negative impact on the market.
The news regarding the growing acceptance of cryptocurrencies as a payment system in major countries or the choice of a large investor to invest heavily in cryptocurrencies may be positive for the market.
social media pages
Checking social media pages for what members of the project community think of them is a good way to gauge feelings about such a project. Telegram and Discord have become popular platforms for many crypto users and investors, and you will also find them useful in 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 gather market sentiment information. 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 range of different market sentiment indicators to check for bullish or bearish trends in the cryptocurrency market. These indicators usually represent information in the form of a scale. Let’s consider two indicators that you can use to get an idea of the bitcoin market sentiment.
1. Bitcoin Indicator for Fear and Greed
This indicator shows the level of Bitcoin fear and greed on a scale from 0 to 100. Additionally, the indicator analyzes various information such as market volatility, volume, social media, trends, and dominance.
This indicator tries to weigh fear and greed in the market. When the bitcoin price goes up, more investors want to get in for fear of losing out (FOMO). Thus, many become 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 in the Bitcoin Fear and Greed Index indicates that the market is in a state of extreme fear, while a reading of 100 shows that the market is in a state of extreme greed.
2. Bull and Bear Pointer
This indicator analyzes social media conversations to show how up or down they are. A reading of 0 shows a very downtrend, while one indicates a very uptrend.
Software analysis data is based on 93 emotions and topics sourced from Reddit, Twitter, and Bitcointalk, and is updated hourly.
The importance of analyzing market sentiment
Doing an emotional 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 basic trading metrics. Identifying potential price trends before they happen in the market puts you in a better position to make the most of the information.
Constantly executing trades generated by analyzing the market with general market sentiment, technical indicators and fundamental indicators will give you better results. The combination of sentiment analysis and your trades will also help you trade with more confidence, purpose and less emotions.
Emotional analysis is not enough
You cannot rely solely on emotional market analysis to execute trades. To be successful, you need to combine sentiment analysis, technical and fundamental analysis. There is also no guarantee that some major event will affect the market price significantly. Thus, it is difficult to predict the reaction of the market at all times.
The information on this website does not constitute, and should not be considered, financial advice, investment advice or trading advice. MakeUseOf does not advise on any trading or investment matters and does not advise that any particular cryptocurrency should be bought or sold. Always perform your own due diligence and consult a licensed financial advisor for investment advice.
