Is understanding crypto market sentiment and its importance quite important? Crypto market sentiment is something that involves the thoughts of the investors and therefore is also called crypto investor sentiment.
It is based on the moods and feelings of the investors regarding a particular crypto asset or lots of it combined.
Though these sentiments do not cause any notable effect on the fundamentals of the crypto asset or the market cycles, it surely does affect the price of it significantly.
It may not cause a positive market condition but will help you to make corrections in your trading strategies and know about the potentially productive market trends to follow.
Since, the crypto market is directly linked with the market demand and supply of coins, the public opinions as well as that of the social media and press can be affected and altered.
Therefore, if you want to make a productive investment in the crypto world, short-term or long-term, it is important to know the market sentiment along with a proper and precise fundamental and technical analysis.
However, this is not easy. You will need to know a lot of things before you assume that you have understood the market sentiment well. Check out Best Online Crypto Brokers.
You will need to know when the market sentiment is bullish and causes a price rise and when it is bearish when the prices of crypto assets fall.
You will need to know above and beyond the basics and even have to use several different market sentiment indicators in your analysis methods to spot out the better entry and exit points.
Contents
Understanding Crypto Market Sentiment and Its Importance
Typically, it is paramount for a crypto trader to conduct market research and analysis and that should be based on the market sentiments.
The information gathered and the results obtained will enable a crypto trader to forecast price movements and make more productive investment decisions in crypto coins.
All market dynamics will be known based on the overall attitudes of the investors and it will help you to differentiate between hype and reality surrounding a particular crypto asset.
It is true that optimistic market sentiments may not always affect the market cycle but it may indicate an upcoming bearish movement or retracement.
Now you may ask, then what is the importance of investor sentiments if it does not depend on or affect the fundamentals.
Importance of it:
There is a lot of importance to know the market sentiments and analyze them properly. First and foremost, it will help you to make much better investment decisions and rectify your trading strategies according to it, if necessary.
In addition to that, knowing the market sentiment will enable you to understand whether the price movements are caused simply due to the herd mentality of the investors or a FOMO or Fear of Missing Out is more justified.
When you combine both technical and fundamental analysis with the market sentiments, it will help a lot in your study. It will help you in other useful ways as well such as:
- You will have a fair idea about the price actions and its effects both in short term and mid term
- You will be able to have a much better control over your emotions and sentiments so that it does not affect your investment decisions and
- You will also be able to find out a lot of different highly potential avenues of crypto investing and trading to make more profits.
Market sentiment analysis is of utmost importance for the day traders as well as technical analysts both. This is because market sentiments sway the technical indicators due to price fluctuations in the short term.
Therefore, it is elementary for a trader or investor to track the moods correctly and act on the basis of it to make the most profits from their investments.
Method to follow:
Now that you know what market sentiment is and what is the importance of it in the crypto world, you must know the sources to gain such information and the methods to perform a proper and precise crypto market sentiment analysis.
First of all, you will need to know the general moods and the overall attitude of the investors in the crypto market.
You can do it from a lot of different sources and in a lot of ways such as by collecting the opinions, views, and ideas of the investors.
However, that does not end there. Before you make your monetary decision you will be better off if you combine the data collected with it for a proper analysis.
For this you will need to use different useful statistics, facts and figures such as:
- The sentiment indices
- The funding rates
- The community analytics.
These facts will help you to discover and monitor the price movements and the trajectory of the crypto assets.
Typically, making a broader and more robust price analysis is the most significant purpose of market sentiment.
The best way to make out the basic tone of the crypto market is to look at the social media platforms and the crypto community.
These pages will let you know the mood of the traders and the industry on the whole. The different sources include:
- Telegram channels
- Discord
- Facebook and more of such discussion forums and platforms.
When you interact directly with the participants of this ecosystem, barring the fraudsters however, it will help you a lot in conducting a more comprehensive research before you arrive at any specific conclusions.
However, this is just one small aspect of it. In addition to going through the social media networks and pages, you may also consider doing other things as well. These are:
- Using different data collection tools and software to monitor the mentions made o the social media pages
- Keeping yourself updated with the latest events and news in the crypto industry through different journals, blogs, news sites, and media publications such as Binance Blog, Binance News, CoinDesk, CoinTelegraph, Bitcoin Magazine, and more
- Knowing about and monitoring the whale activity of the larger crypto coin holders in the crypto industry by using different tools such as Whale Alert and others that you may find in Twitter and Telegram and by setting alerts
- Using different market sentiment indicators and indices such as Fear and Greed Index to adjudge the overall feeling and mood of the crypto investors and community at large.
Following all these steps will help you to gauge the hype surrounding a particular crypto asset. Additionally, you will be better off in knowing the sentiment for a particular crypto project if you use tools like Google trends.
Factors to consider:
Now, take a look at the factors that will affect your market analysis. Knowing these factors will ensure that you make an accurate prediction of the price fluctuations.
Funding Rate:
This is perhaps one of the most significant factors to consider for a proper crypto market sentiment analysis.
This metric is the periodic payments that are made to the crypto traders. These payments are based on the difference that results from the difference in the spot prices of the crypto coins and the perpetual contracts.
In simple terms, the differences in funding and its rates occur when the crypto traders buy Bitcoin or any other crypto coin by borrowing US Dollars in a bullish market.
As a result, the traders short the coins and therefore the funding rates of crypto coins become higher than that of the fiat currency.
If the funding rate is positive, it usually indicates a bullish market in which the long traders will typically pay the short traders.
On the other hand, if the funding rates happen to be negative, it will signify a bearish market and in that case the short traders will be typically paying the long traders.
You may refer to other sources to collect relevant data on the funding rates such as:
- CryptoLend
- DeFi Rate
- Coinlend and
- LoanScan.
Alternatively, you will find a diverse range of tools that will enable you to track the funding rates on the crypto derivative or futures exchanges as well.
Sentiment Indices:
When you use the sentiment indices, you will be able to easily assess the state of the crypto market as of now based on different numerical indicators.
Ideally, a sentiment index will help you to see and judge the behavior of the crypto investors. It will let you know whether or not they will behave greedily or fearfully.
Add to that, you will also know whether their behavior is influenced by several other factors such as:
- Volatility of the market
- Momentum of the market
- Price fluctuations
- Responsiveness of the investors to market surveys
- Demand for junk bonds
- Google Trends and lots more.
Ideally, a market can be categorized under two specific heads namely, as greedy or fearful. The investors will consider it to be a good opportunity to buy crypto coins in a fearful market.
On the other hand, they will consider it to be a good time to sell off their holdings in a greedy market. However, it is important to pick the right type of crypto assets, especially when you buy them in a fearful market.
Social Media:
The social media platform plays a significant role in making a more subjective and relevant community analysis.
You will get a lot of different types of statistics that will help you in the analysis of the crypto market judging by the sentiment of the players involved in it.
This can be judged easily by tracking their activities on different social media platforms. If you find that a particular social community is highly active and engaged, it is imperative that they will have quite a large number of followers.
They will also result in having some very meaningful and useful social interactions and discussions across these platforms.
Here, Google Trends needs a special mention. This particular tool helps you a lot to know about the crypto market sentiments by showing the search activities of the people involved based on specific keyword phrases such as ‘How to sell Bitcoin.’
You can easily make out whether the searches for a particular crypto asset are trending downwards or upwards.
This will, in turn, help you to find out how exactly the crypto traders and investors feel about a specific crypto coin and exactly how much hype there is regarding it.
You will also be able to know their sentiments regarding the latest and ongoing developments in this field along with the road map for progress.
Hype will typically attract more and more participants in the market which, quite naturally, as an indication of a bullish sentiment coming up.
However, the good thing about social media is that it offers a lot of varied platforms to collect information and there is no need to blindly believe a particular set of information from one particular social media channel.
In fact, you can compare different activities surrounding different crypto coins across different platforms.
This way you can find out the particular market trend that is gaining widespread support from the crypto investors and at the same time is motivating the current market movements or those that are coming up.
Whale Monitoring:
In the crypto world, a whale is supposed to be an investor who holds a large number of crypto coins and also makes large amount of transactions across different blockchains.
Therefore, in the literal sense, whale monitoring is nothing but keeping a close watch on the activities of the prominent players of the crypto space.
As a whale watcher, all you have to do is identify the productive and profitable trades made by these big players and then plan your course of action accordingly.
The blockchain explorers can help you a lot in analyzing the exchanges of crypto coins made across different markets but you may not get a clear idea about the effects of supply and demand on the market with these on-chain metrics.
You will need to have much more specialized insights and a lot more data for that.
You may try out different sources that are commonly used by aspiring crypto traders to track crypto whale trading activities more efficiently. A few of these sources include:
- WhaleTrace
- Whale Alert and
- ClankApp.
If you use these sources, you will be able to know a lot more without having to be well versed about the technicalities required to segregate the impact.
Tools to use:
In order to know the market sentiments clearly, you will however need to know much more than the objective crypto trading strategies.
For this you will need to make some proper and precise technical analysis by using some of the most useful market sentiment indicators.
The objective of these indicators is to give you an idea of the bearish or bullish feel of the investors about the crypto asset or the market on the whole.
The feelings can be represented in two distinct ways such as:
- With the help of few graphs or
- Based on a scale.
You will be better off if you use several market sentiment indicators at a time. This will help you to get a more even-handed view of the crypto market.
Here are a few market sentiment indicators that you must use for a better market analysis.
- Technical analysis tools
- Fundamental analysis tools
- Fear and Greed Indices
- Bull and Bear Indices and
- DeFi TVL or Total Value Locked ratio chart.
Though most of the market sentiment indicators typically assess Bitcoin or BTC, there are also a few others that you may find on the Ethereum sentiment indices.
Out of the tools mentioned above, the most commonly used is the Fear and Greed Index for knowing the crypto market sentiment.
It shows fear or greed in the Bitcoin market on a scale of 0 to 100. It analyzes different factors to rate them such as volatility, dominance, trends, and more.
Here 0 indicates extreme market fear and 100 signifies extreme greed and this is when the price of crypto coins start to rise significantly creating FOMO among the participants.
The Bull and Bear Index tool is also quite popular among the crypto investors for studying market sentiments.
This software makes the best use of Artificial Intelligence to analyze more than 93 topics and sentiments.
The sentiment is represented as either 0 or 1, based on the data available, where 0 indicates an extremely bearish market and 1 signifies a highly bullish market.
However, if you want to make your market sentiment analysis a lot more effective then you should strictly combine technical analysis tools with fundamental analysis, whether or not you use the other ones.
This is because proper technical analysis will allow you to make much better predictions of the price actions in the short term and fundamental analysis will help you in evaluating the long term potential of a crypto coin.
Reliability:
In the end, you may be wondering how reliable your market sentiment analysis will be in trading crypto coins in this volatile market. Well, the short answer is: it will be extremely useful.
You will have a much better and clearer picture of the price actions even before it emerges.
This will, in turn, help you to develop more productive trading strategies and make much better choices of crypto coins to invest in.
However, do not expect to have the best and maximum results at the first go.
Understanding crypto market sentiment needs some time and a fair bit of practice to gain enough experience to analyze the status of the market.
Therefore, it is expected that you will do your due diligence so that it works well and helps you to make the right crypto trading and investment decisions and avoid the inherent risks in it so that you get higher returns on your investments.
Conclusion
Understanding market sentiment and its analysis is very important for crypto traders as crypto markets and blockchain industry is rather small compared to public sentiment and perceptions that can result in erratic price fluctuations.
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