The blockchain and cryptocurrency market is a burgeoning one with a range of assets and exchanges. Although similar to the traditional stock market, market capitalization of the crypto market keeps fluctuating. At the time of writing, the market stands at US$2.5 trillion with more than 15,300 assets traded across more than 430 crypto exchanges. Nearly 40% of this market is occupied by Bitcoin, while another 20% odd is occupied by Ethereum. The rest of the 40% constitutes the fragmented long tail of the market.
There are other elements to the crypto market as well. For instance, there are decentralized finance protocols that serve as the foundational platforms of the DeFi economy. These platforms help leverage crypto assets as a proper financial tool—something that you can use to borrow and lend. The total value locked in these platforms, such as Ethereum, BSC, Terra, Avalanche, Solana, Tron, Fantom, Polygon, Arbitrum, and many more, is nearly US$260 billion at present.
While these market components keep changing their positions—along with the volume they handle—their behavior is not enough to explain what the sentiment of the crypto market, at any given point in time, is. A crypto market sentiment has many more aspects to it.
The crypto market sentiment is a summarized reflection of investors’ thoughts, feelings, and moods about an asset. The fundamental strengths and weaknesses of an asset do not always reflect in crypto market sentiment. But, it has the power to define and determine the price of an asset.
Industry experts try to analyze this sentiment and predict imminent price movements.
These movements, seen in the context of the participants’ attitudes, help you get an overall idea of how much hype or fear exists surrounding a specific cryptocurrency.
Some tools help us understand which way crypto prices are moving. The Fear and Greed Index is one such tool. The traditional stock market also has a Fear and Greed Index, helping traditional investors measure the two primary market-influencing emotions.
When it comes to the crypto market, this index is only for Bitcoin, so far, and helps capture the bearish and bullish trends in the market, pivoting on investor sentiment for the coin.
For Bitcoins, investors become greedy when prices are rising. The other end is where fear resides. The index is measured on a scale of 0–100. Zero represents extreme fear, and 100 represents extreme greed. 50 is a neutral score, implying that investors are neither greedy nor fearful. A fearful market, where prices are going down, may offer a good buying opportunity. On the other end, a market closer to the Greed terminal is up for a price correction.
While the Fear and Greed Index is one of the most prominent and tested indicators of crypto market sentiment, there is also the Bull and Bear Index that considers social media as its base.
It stems out of an AI software that analyzes more than 90 sentiments and topics using interactions on platforms like Twitter, Reddit, and Bitcointalk. The test methodology also draws its validity from past available data. On the Bear and Bull index scale, zero indicates an extremely bearish market, while one implies an extremely bullish market.
Apart from these well-established market indices, there are other ways to gauge crypto market sentiment. If you have the time and resources to do the work yourself, you can leverage the available data collection software tools to track social mentions.
Some media portals and blogs cover market events extensively. You can use those to stay up to date with what’s happening in the market. It is also helpful to track large market transactions as they have a considerable impact on which way the market is going to move.
These transaction alert bots are available for free on platforms like Telegram and Twitter. Google trends also help look through the hype and decipher the real emotions playing out behind the movements.
If you are a traditional investor who is into the stock market as well, you can use traditional methods of analysis too. Technical analysis, as well as making use of charts with previous price action and volume data, help predict how the market will behave in the future. Then there is the fundamental analysis that aims to gauge the intrinsic value of an asset by analyzing as many quantitative and qualitative factors as possible.
These factors relate to the health of the business and that of the macro-economic environment it operates within. Such factors include company management and reputation, industry health, market capitalization, and several other economic factors. The conclusion that the fundamental analysis helps arrive at is whether an asset is undervalued or overvalued.
Understanding market sentiment is crucial for the development of trading strategies. It helps draw actionable conclusions on the real worth of a project or a trend. Analyzing sentiment forces you to consider a lot of factors that you often tend to overlook. The price movements are not sufficient to gauge the long-term worth or value of a project. It also helps you understand whether market sentiments are justified or just a result of the hype and our herd mentality affirming the hype.
Analyzing market sentiment properly and scientifically helps you assess short and mid-term price actions. It also helps you keep your composure. And, most of all, you can cut the clutter and discover profitable investment opportunities.