What is Crypto Market Sentiment and Why Does it Matter?

5 min readJul 7, 2021

Understanding crypto market sentiment, its impact, and how to perform sentiment analysis

Also known as crypto investor sentiment, crypto market sentiment can be described as investors’ overall attitude regarding the cryptocurrency market. This psychology of market players can reflect on the general price trend. Market sentiment drives the supply and demand, resulting in the movement of price in the cryptocurrency market.

Market sentiment utilizes investors’ moods and feelings towards an asset to speculate the price movements of cryptocurrencies. The market sentiment is bullish when prices are rising and bearish when the market prices are dropping. Investors combine market sentiment indicators with other analysis methods to polish their entry and exit points.

Understanding Crypto Market Sentiment

Technical analysts and day traders rely on market sentiment, which sways their technical indicators due to short-term price fluctuations resulting from crypto market sentiment. An investor must correctly track the general mood of market players and act on it fast to reap maximum returns on investment.

Like any other asset, the price of cryptocurrencies depends on the interplay between supply and demand. Alongside other analysis methods such as fundamental and technical analysis, crypto market sentiment can be a worthwhile supplement to every crypto traders’ tool chest.

Nevertheless, optimistic market sentiments do not always drive the market. On occasions, a robust and positive attitude in the market may arrive just before a retracement or a bear rally. The investor sentiment does not always hinge upon fundamentals.

One prime example: the recent Dogecoin bull run.

The Dogecoin rally was mostly driven by a social media push resulting in optimistic market sentiment. Most investors purchased Doge out of positive social media hype without considering the coins’ tokenomics or objectives. Just one tweet from an influential figure in the cryptocurrency industry such as Elon Musk can positively or negatively impact the market.

Benefits of Market Sentiment Analysis

It is always essential to use all the information available before opening a cryptocurrency trade. Similar to technical and fundamental analysis, learning the general market sentiment is equally as important. For example, the market analysis would help determine whether FOMO (fear of missing out on a trade is merited or just instincts. Combining fundamental and technical analysis with market sentiment analysis enables a trader to:

Have more precise insights on short-term or medium-term price movements.
Have control over emotions when trading.
Identify potentially profitable price trends.

The application of market sentiment in general price analysis is broad and robust. Today, many traders have adopted the practice of extracting insights from social media networks and using that data to make their final trading decision.

How to Perform Crypto Market Sentiment Analysis

To learn the general mood of the market, you will need to collect views, opinions, and ideas. That said — don’t rely on market sentiment alone. It would be best to combine all the data before making a monetary decision.

To perceive the fundamental tone of the market, you may want to look at the pertinent social media pages and platforms to find out how the general industry and traders regard a particular digital asset. You might need to join Telegram channels, Reddit discussions, Discord, and all other official forums of a particular project to interact directly with the ecosystem participants. However, you might need to watch out for fraudsters pretending to be project officials in these forums. Make sure you conduct comprehensive research before drawing any conclusions.

Analyzing social media networks is just the tip of the iceberg. On top of using social media pages, you should also consider doing the following:

Monitor social media mentions using data collection tools.
Keep yourself updated with the latest industry news through popular cryptocurrency media publications and blogs such as CoinDesk, CoinTelegraph, Cryptopolitan, The Block, etc.
Monitor whale activity in the cryptocurrency industry. Use tools such as Whale Alert to monitor what large cryptocurrency holders are doing in the market.
Use market sentiment indicators to learn the general feeling of the community and investors. Indexes such as the Fear and Greed index provide various sources and summarize the present feeling in the market.
Gauge the amount of hype surrounding a crypto project using Google trends. For example, a vast search volume of ‘how to buy Bitcoin’ could suggest an optimistic market sentiment for Bitcoin.

Market Sentiment Indicators

Crypto investors can use various market sentiment indicators to find out the bullish or bearish feel of the market or a certain cryptocurrency. Indicators exhibit the market sentiment graphically or using a type of scale. Remember — it is advisable to use different indicators to obtain a more clear perspective of the market.

The majority of sentiment indicators in the market revolve around Bitcoin, but you can also find the Ethereum sentiment index. The most common sentiment indicator is the Bitcoin Crypto Fear and Greed index. The index attempts to quantify the strength of the prevalent emotions and the general sentiment of the Bitcoin market by leveraging different sources and computing them into a single figure bound on a scale of 0–100.

A value of 0 indicates that the market participants have reached a point of extreme fear, and if the value reads 100, it shows the market has reached a point of extreme greed. When the price is soaring to higher levels rapidly, the players can be greedy, creating FOMO for the ones watching on the sidelines and leading to additional capital entering the market. On the other hand, cryptocurrency investors might be tempted to sell their holdings when the price is dropping fast. The Bitcoin Crypto Fear and Greed index attempts to gauge the extremes in both directions.

Closing remarks

Market sentiment analysis can be extremely useful to cryptocurrency investors and traders. This is because the crypto industry and blockchain technology are relatively new and still in their early stages, and crowd attitude and sentiment towards an asset can cause volatile price movements. By employing the methods explained in this article, you can start making market sentiment analysis and draw informed investment conclusions.