Market sentiment is the attitude of investors towards a particular security or financial market. It’s the current market feeling, and it’s tied to the activity and price movement of the asset being traded. If market sentiment is negative, for instance, that could explain why people are selling.
In this sense, market sentiment drives demand and supply, which might make it possible for investors to have a general outlook about the future possibilities of a particular market from its price movements.
With the use of market indicators, some investors rely on market sentiment to try and make profits by finding securities that are overvalued or undervalued. If market sentiment seems bullish (positive outlook), investors may buy an asset in anticipation of a price rise. If market sentiment seems bearish (negative outlook), investors may short an asset in anticipation of a price decline.
Market sentiment can swing one way or another quite quickly. As we’ve seen the last few years, the start of a pandemic or war can damage market sentiment, while major institutions buying Bitcoin can boost market sentiment (source). That’s why you always should pay attention to sentiment.
Technical traders and investors could rely on sentiment indicators. These indicators shed light on human behavior and tendencies that could influence financial and crypto markets. Some experts argue sentiment indicators are even more valuable in crypto, as many tokens aren’t valued by the same metrics stocks are (price-to-earnings ratio, free cash flow, debt-to-equity ratio, etc).
In the crypto world, some of the best sentiment indicators include the Social Media Sentiment Analysis, Fear & Greed Index, Volatility Index (VIX), and High-Low Index. In this article, we’ll cover what these sentiment indicators are, and how you could use them to make more informed trading and investment decisions.
Want to learn more about cryptocurrency and Bitcoin mining? Check out some of other articles from our crypto education series:
Social Media Sentiment Analysis
Sentiment analysis tools for social media give insights into the ongoing activities on social media. For instance, while an average person may not want to know everything that’s happening on social media about a particular security or financial market, such information is very valuable for technical traders. And that’s what the social media tracker tools provide.
Think about it, sifting through all of those mentions manually would be an impossible task to complete. However, by using automated systems, a simple click will tell you how people probably feel about a particular security.
An example of a Social Media Sentiment Analysis tool is LunarCrush, a social intelligence tool for crypto. LunarCrush provides real-time market data on social volume, social engagement, influencer mentions and more. The LunarCrush feed can be especially useful for getting news before the rest of the market does.
Fear & Greed Index
The crypto market is very emotional and everyday traders should analyze sentiments from different sources to determine just how greedy or fearful the market is.
For instance, in the crypto market, people sometimes get greedy as soon as the market value rises because they fear they might miss out on a lucrative opportunity. That fear of missing out (FOMO) leads to more buying, which could lead to higher prices.
However, when the market value recedes, people fear losing and begin selling their assets. This fear, uncertainty and doubt (FUD) leads to more selling, which could lead to lower prices.
The Fear and Gear Index simplifies the whole process for investors by putting fear level and greed level into a simple metric ranging from 0 to 100. The index can work to save you from an emotional overreaction, and instead focus on what the market sentiment says.
It’s quite simple to understand too. For example, when the value falls towards 0, it signifies extreme fear. But when it’s rising towards 100, it signifies extreme greed.
The crypto market has been especially fearful during Q1 2022.
How you use the Fear & Greed Index when trading Bitcoin or other cryptos is entirely your decision. However, do understand that fear usually rises during market downtrends, while greed usually rises during upward trends. So, remember Warren Buffett’s words:
Volatility Index (VIX)
Volatility Index (VIX) is a real-time indicator created by Chicago Board Options Exchange (CBOE) that measures the volatility of stock prices. VIX is used to determine the market expectations of volatility, and can have its use in crypto (a notoriously volatile asset market).
For instance, traders use VIX as a tool for assessing risk and capitalizing on volatility itself. Some traders also pair moving averages to the Volatility Index to determine the relatively high or low of a specific security.
Why measure the volatility of a market? Volatility increases the uncertainty and risk of a market and measuring it helps avoid this uncertainty. Savvy traders also try to leverage volatility to their advantage, buying dips and selling rips (or swing trading).
Want to explore the crypto market volatility? Check out the ranking of over 1500+ coins based on their market volatility. As you can see, the cryptocurrencies with the lowest volatility are stablecoins, like Tether.
High-Low Index is an indicator that gauges the strength and weakness of a particular security. The high-low index compares the number of assets making highs to the number of assets making lows.
How does it work?
When the index is below 30, asset prices are considered to be on their lows, which is a signal of a bearish market to investors. But when the index is above 70, asset prices are going toward their highs, which is a signal of a bullish market to investors.
This is the formula for the High-Low Index. If you use it for crypto, you should be able to get an idea of how the larger market is moving.
Making of the Market Sentiment Analysis
There is no crystal ball, especially in the investment world. However, paying attention to market sentiment equips you with more data and knowledge. While that’s still no guarantee for success when trading Bitcoin, Ethereum and other cryptos, it might be better to make informed decisions, rather than let emotions drive. So, consider using these market sentiment metrics to help with your investment journey.
What metrics do you like to use when trading Bitcoin? Leave a comment below or join our Telegram and start a conversation.
*This article is for informational purposes only, and should not be considered financial advice. Understand that market sentiment metrics are NOT always reliable for determining market direction and could mislead you. Do your research and consult with a financial advisor before making trading decisions.