What Is Market Sentiment in Crypto Investing?
Whether you are new to cryptocurrency or a long-time investor, chances are, you’ve heard about market sentiment regularly. But what is market sentiment exactly, and should you worry about it?
Market sentiment is the average mood of the investors in a certain space. And while it is subjective, it can be used to help predict market trends. Read on to discover all the details about market sentiment in crypto investing.
What is Market Sentiment in Crypto?
Market sentiment is the combined mood of several investors in a specified market. It is important to note that market sentiment does not include all of the investors in a space. Rather, it is more like an average conclusion reached via multiple conversations with a variety of investors during a specified time frame.
Market sentiment is a generalization, and thus, very broad terms are used when discussing this indicator. Some examples of words used to label market sentiment are optimistic, pessimistic, or fearful. This has led to the creation of the Fear and Greed indicator.
How is Market Sentiment Used?
Market sentiment is an unusual indicator, and while it does carry some weight in the cryptocurrency space, you should know that it does not apply to all types of investments.
In cryptocurrency, because many prices are based on the laws of supply and demand, market sentiment is used to gauge whether a bull or bear run may be coming. This is because, if the market sentiment is overall pessimistic, it is unlikely that investors will test new projects and vice versa. Not only that, but because cryptocurrency still isn’t mainstream, many of the upcoming projects reach high levels due to word-of-mouth marketing. If the market sentiment is bad, it is unlikely that investors will spread news to new investors, causing a market downturn.
We do want to mention that media is critical in the crypto space, and market sentiment has a huge effect on the media—which means the more news stories and interviews you see, the more positive, or negative the market sentiment may be.
Therefore, in cryptocurrency, market sentiment is often used to try to predict price fluctuations.
Does Market Sentiment Affect Prices?
Unfortunately, market sentiment, while it isn’t a reliable indicator of coming price changes (though that doesn’t stop people from analyzing it), it does affect the prices of cryptocurrencies. As we mentioned above, cryptocurrency relies heavily on current investors inviting their friends and family to invest. Therefore, if more people feel pessimistic about the future of crypto, they are unlikely to tweet to their friends and family to invest in a project.
Is Market Sentiment a Reliable Indicator?
Sadly, market sentiment is not a reliable indicator of coming price changes in crypto. This is for a few reasons.
One reason is that market sentiment is so closely tied to the media, and many scammers take advantage of it to sell their token. A premium example of this is in Argentina when the president, Milei, endorsed a token on national television, only for it to spike and crash hours later. Proving that not even market sentiment can save a doomed token.
Secondly, gauging market sentiment is not an exact science. It’s a generalization made by individuals, and as usual, individuals aren’t perfect. Plus, most individuals only consider their circle, or the news they are exposed to, when a channel they don’t watch has a completely different sentiment than they do. This means they may be coming to conclusions based on a bias they are unaware of.
And third, market sentiment can change in an instant. There are so many outside factors affecting market sentiment, by the time you come to one conclusion the first person you may have interviewed might have already changed their mind. As such, we recommend considering different metrics when trying to decide to buy cryptocurrency.
Should You Consider Market Sentiment When Investing?
In our opinion, you should ignore market sentiment when deciding whether or not you should make an investment. We recommend taking the time to do your own research and critical analysis before putting your hard-earned money into something.
That being said, you should be aware of what the current market sentiment is, as this can help you mentally prepare for coming dips or spikes in price. That, and if you hear everywhere something is a scam—you should definitely listen.
What is the Current Cryptocurrency Market Sentiment?
Currently, the market sentiment is generally neutral, but closer to pessimistic than optimistic. Cryptocurrency has been on a roller coaster this past year, having the highs of whispers of legalization in the United States, but the general economic state of the world has brought it crashing back down each time.
The truth is, the economy is struggling around the world right now, and individuals are generally pessimistic about the state of the world. Plus, with Trump gaining more and more enemies, many institutional investors are starting to worry a war is brewing—and war is never all that great for the cryptocurrency economy.
But, as we mentioned above, if you want to invest in cryptocurrency, you shouldn’t let the general market sentiment stop you. Just because some individuals would never invest in anything right now (because they need to stockpile the basement) doesn’t mean you need to do the same.
Rather, we advise as we always do—take the time to read about the cryptocurrency you intend to invest in, and listen to the market sentiment, but don’t base your purchase on that alone. Also, look at the market capacity, how the token is received by users, and the whitepaper plans. But if it looks like it’s a scam and the market says the same—run.
Overall, market sentiment can be one of many indicators used to evaluate the viability of a cryptocurrency purchase. However, it should not be the sole indicator used, and you should take the time to learn more about your investment before making it.
