For crypto traders, especially newbies, understanding the crypto market’s sentiment is a big plus. It helps you aggregate the majority opinion and thoughts about the crypto market, and with such information, you can leverage the market’s changing directions. Unlike technical and fundamental analysis where it takes a structured approach to understand price behavior, sentiment analysis aims to understand how individual perspectives impact the market price.
Cryptocurrency market sentiment analysis grants more insight compared to conventional stock or Forex markets due to the industry’s social nature. After all, a single tweet or road map update has been known to send a coin to the moon or bring markets crashing down.
In this article, we will be discussing what a crypto market sentiment is, how it affects the industry, and if it is a good indicator for trading.
Defining Crypto Market Sentiment
A crypto 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.
Still, favorable market sentiment doesn’t always lead to positive market conditions. Sometimes, strong positive sentiment (it’s going to the moon!) may come before a market correction or even a bearish market.
Besides providing insights into market demand, traders can analyze these sentiments to predict potentially profitable trends. Market sentiment doesn’t always consider a project’s fundamentals, but they might be linked sometimes.
Let’s take Dogecoin as an example. A lot 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 enough sometimes to cause positive or negative market sentiment.
How to Gauge Crypto Market Sentiment?
There is no particular way to measure the market mood and traders’ predominant trading psychology because different factors affect general market sentiment. For example, a major crypto exchange crash or hack can cause traders and investors to lose trust in the market and start withdrawing their investments from other exchanges. Such a happening can trigger an unexpected bearish sentiment.
Instead of trying to find a precise way to measure market sentiment. You should get a way to know the views, ideas, and thoughts of different people involved in the crypto market. Some things you should be on the lookout for are:
Crypto Hype
Crypto hype can affect the market’s sentiment towards a particular cryptocurrency. Such hype can be triggered by an influencer or major crypto project leader. Sometimes it could be a rising interest in a token. The Elon Musk example we gave earlier is an example of crypto hype.
One of the ways to gauge the hype surrounding a crypto project is to use Google Trends. A high search volume for a specific cryptocurrency can indicate what many investors think.
Crypto-Related News
You must be updated with the latest industry news and market happenings from trusted crypto news platforms. A major event, such as the prohibition 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 acceptance of cryptocurrency as a payment system in major countries or a big investor choosing to invest heavily in crypto could be positive for the market.
Social Media Pages
Checking social media pages to know what a project’s community members think about it is a good way to measure 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 gather information include Twitter and Reddit.
Indicators for Crypto Market Sentiment Analysis
Market sentiment analysis is a core component of accurately assessing the growth or decline of a cryptocurrency coin or token. While investors can consult many resources to gain market insight, here are the main must-have indicators for every cryptocurrency market sentiment analysis.
Technical Analysis
Technical analysis aims to forecast future prices in the short term by looking at previous prices and trade volumes of a certain cryptocurrency. Analysts believe that trading patterns follow identifiable trends and that these trends usually repeat themselves. Examples include moving averages, Bollinger bands, and Elliot Wave patterns.
Fundamental Analysis
Analysts from this school of thought seek to determine the intrinsic value of a cryptocurrency. Their approach is to decide whether the asset is overvalued or undervalued. This includes studying metrics like the team behind a project, the application of the technology, how widely it is being adopted, case studies using that technology or cryptocurrency, and blockchain and financial metrics.
Fear & Greed Index
In conventional stock markets, the Fear & Greed Index provides a global market sentiment indicator. The sentiment index has a numerical value that ranges from 0 to 100, with 0 being a state of extreme fear and 100 being a state of extreme greed. It aims to show whether investors are behaving fearfully or greedily. The rating is influenced as described in the section above entitled “Understanding Sentiment Indices.”
The Bitcoin Fear & Greed Index similarly gauges the prevailing attitude toward cryptocurrency in cryptocurrency markets and is calculated using six indicators. These include volatility, market momentum, social media, surveys, Bitcoin dominance, and Google Trends.
Bull & Bear Index
Another popular, reliable Bitcoin sentiment indicator that focuses on social media metrics is the Bull & Bear Index (BBI) developed by Augmento, an AI initiative that quantifies crowd psychology. The BBI correlates data from Bitcoin Forum, Reddit, Twitter, and the market movement of the digital assets, analyzing 93 sentiments by using artificial intelligence to evaluate topics and conversations. Zero indicates an extreme bear market, while 1 is extremely bullish.
DeFi Total Value Locked
DeFi total value locked (TVL) is an accurate representation of the health of DeFi and its markets. TVL factors in the total current supply, the maximum supply, and the current cryptocurrency value. Traders use the TVL ratio to assess whether an asset is overvalued or undervalued.
To calculate the TVL ratio, multiply the current supply in circulation by the current trading price. Divide the resulting product by the market capitalization value, and you have your TVL ratio. When the TVL ratio falls below 1, it typically indicates an undervalued DeFi asset.
Altcoin Gainers and Losers
Like a constantly changing scoreboard, Altcoin gainers and losers are the top-performing or crashing coins across various time periods. Instead of charting gains and losses across various cryptocurrencies manually, investors can use numerous available cryptocurrency investment trackers.
Some of the best altcoin gainers and losers trackers you can use to aid your crypto investment strategies are CoinMarketCap, CoinCodex and CoinGecko.
Final Thoughts
Crypto market sentiment can be an incredibly useful tool to add to your arsenal. However, the indefinite nature of aggregating public opinions, attitudes, moods, and outlooks means that there is no one correct model for measuring market sentiment. When combining sentiment analysis with technical and fundamental analysis, a clearer picture of price action emerges.
Cryptocurrency market sentiment analysis empowers the proactive investor with broad market insight applicable to each and every trade. As with any financial investment, the more information you have, the better chance you have of understanding the market. That translates to better chances for you to plot successful trading strategies. After all, markets based on supply and demand are heavily influenced by psychology.
