What is market sentiment?

Market sentiment is the general attitude of market participants toward the market at any point in time. 

It is a powerful force that may be influenced by factors like supply and demand, confidence in the economy, or changes in governmental policies.

However, note that market sentiment does not always rely on fundamentals. Psychological and emotional factors like excitement, euphoria, anxiety, fear, greed, FOMO and FUD can hugely influence the market. FOMO (fear of missing out) and FUD (fear, uncertainty and doubt) have a strong influence on decision-making and, therefore, on the market as a whole. 

Investors are human beings, so markets are an aggregate of human choices. This means that markets are not always rational. 

Market sentiment is either bullish or bearish, depending on the level of optimism or pessimism among participants. If most participants are optimistic, more people will buy, creating an upward trend or bull market – picture a bull swinging its horns upwards, driving prices higher. 

On the other hand, if the collective attitude of most market participants is that prices will fall, assets depreciate, and people start selling to reduce losses,. Imagine a bear swiping down with paws, driving prices lower. No market ever goes straight up or down. There will always be periods of sideways action, downside and upside movements in both bull and bear markets.

What is reflexivity?

Market reflexivity is the idea that market sentiment is self-reinforcing. It suggests that a feedback loop exists and that participants' perception of the market affects the market’s direction, further altering the participants’ perception. It can cause market prices to become detached from reality.

According to market reflexivity, a rising market will attract buyers, leading to further price appreciation. 

Traditional theories suggest that markets constantly seek equilibrium and all participants are rational and base their decisions on reality. Any fluctuations in the market, like boom and bust cycles, are outliers, and prices will eventually return to equilibrium. 

Market reflexivity goes against the concept that there is a state of equilibrium. Reflexivity suggests that investors don’t base their decisions on reality but instead on their perception of reality. 

The crypto market is still in its infancy, so it is still subject to extreme price swings. For many, the market’s tendency to overreact in response to news and other sources of information can be explained by reflexivity. 

Narratives

In crypto, the term ‘narrative’ refers to a trend or concept that exists for a period of time and drives prices. A narrative may form around a particular trend or concept. Hype builds around that narrative, driving interest and prices. 

Narratives drive the market - money goes where attention flows. But the market's attention span is notoriously fickle, and narratives are constantly shifting.

The crypto market moves in cycles. There are so-called “bullish” periods of rising prices and hype. As well as “bearish” periods where prices plunge and weaker projects die. Every cycle sees different narratives or stories that reflect the current market and speculate on what’s coming next. 

To become an advanced crypto investor, you need to understand how narratives impact the crypto market. You need to know what narratives exist now, which are running out of momentum, and which could be rising in importance. 

Examples of narratives include the DeFi summer of 2021, the rise of NFTs in 2021-22, and the memecoin craze of 2024. 

What is FOMO & FUD?

FOMO or the “Fear Of Missing Out” refers to the fear an investor may feel if they believe they could miss out on a huge opportunity by not entering now. It can also be described as a fear of regret. 

FUD or “Fear, Uncertainty, and Doubt” describes the propaganda tactic of spreading negative or misleading information with the aim of inciting fear, uncertainty and doubt. In crypto, it refers to negative sentiment that influences investors. 

Euphoria and market cycles

In general, when the market starts going up, you see more and more people starting to get interested in that asset. Why?

Simply because prices are going up and they see that other people have made money. Someone might be able to make money at the start. This is where you get more knowledgeable people coming in and doing their research.

However, towards the end of a cycle is when you start to see a euphoric sentiment. At this point, people’s only thesis is that “this asset has gone up, so it will continue to go up” – the weakest type of thesis.

At peaks and bottoms, we tend to reach a point where anyone who wanted to buy has already bought it. So you no longer have any new buyers, and the demand is gone.

As there are no new buyers, there are many sellers, because, for someone to buy, someone else has to sell to them. When we run out of buyers, prices start falling.

The most recent buyers (whose only thesis was “this asset is going up and that’s why I’m buying it now”), start to panic as soon as the price goes down by ~5-10%. Their weak thesis is being tested.

The price goes down, and they sell, which causes the price to fall a little further. This, in turn, causes more people to sell right until the price reaches an attractive level for other investors who have been interested in getting into the asset at X price. This is where we see the bounce.

Near the bottom, we reach a point where no one else is selling. Anyone who wanted to sell has already sold.

Our Top Picks:

DOGWIFHAT

120,650%

SPX6900

17,000%

POPCAT

66,567%

PENDLE

5,002%

SOLANA

2,500%

HYPE

1,740%

Don’t miss our next 100X

Trusted by 230K+ investors

Get started

What is herd behaviour?

Herd behaviour is the natural human desire to want to feel part of a community or group. We’re often easily influenced by those around us, and we tend to exhibit what’s known as ‘herd mentality.’

When met with uncertainty, the human mind is inclined to seek safety in numbers. In the same way, animals tend to react in a group when faced with danger.

In the context of finance, herd behaviour refers to the phenomenon where investors copy the actions of others based on the assumption that those other investors know what they are doing. Herd behaviour is one of the most common behavioural biases in finance.

Rather than relying on their own research and analysis, many investors gravitate toward similar investments as others. This is based on the tendency to believe that a large group of people couldn’t possibly all be wrong about something. People often feel more confident investing in an asset if everyone around them is doing the same.

On a large scale, herd instinct can create bubbles and crashes through panic buying/selling. It can be seen in both market directions. When the number of people investing slows, some will sell, causing others to question their position and sell too. Eventually, this momentum can cause a downside movement.

Herd behaviour can also create momentum which may lead to a bubble. Massive appreciation causes an asset’s price to rise much higher than its actual intrinsic value. The bubble inflates as capital flows in and people buy. But at some point, confidence is lost, panic sets in, and investors sell their positions for fear of further loss. This cascading effect causes massive depreciation in the price and the bubble ‘bursts.’

The crypto market is notorious for herd behaviour and it is especially evident in the case of meme coins.

Note that it can be profitable to buy something that everyone else is buying, as long as research has been done, and a plan and exit strategy is in place. But to succeed, it’s necessary to do more than the rest of the herd and to look for opportunities that others miss. 

What is tribalism?

Tribalism is largely seen as one of the most toxic traits found in the crypto space. While the hope for decentralisation and freedom from a centralised authority should unite the crypto community, many groups that make up the space often do the opposite. 

Now, more than ever, the centralisation of power presents a serious threat to everyone, everywhere. Our privacy, autonomy, and freedom are increasingly at risk. But too often, “how can we create a better world,” is replaced by “how can we defeat other projects?”

Tribalism in crypto typically stems from where people get their information from. Much of the crypto conversation takes place deep in Discord, sub-Reddits and on Twitter. Forums for a particular project can often create an echo chamber. In these forums, people often feed each other the information they want to hear to foster engagement, which soon fosters a very narrow mindset. If someone is told by enough people that a project ‘is the best in the market,’ they’re likely to start to believe it. 

Small communities arise out of these forums with the desire to support their favourite projects as hard as they can and pit them against others. 

The sense of community is strengthened not only by the fact that these investors share the same beliefs in a project, but that those beliefs are embedded in finance, as they will have their invested capital in the project too. There is a sense of belonging through success and loss. 

There’s nothing wrong with supporting an idea you believe in. But this line of thinking is counterproductive to what crypto is all about - innovation. An example of this mindset can be seen among Bitcoin maximalists. They believe that Bitcoin is the only digital asset needed in the future and that all others are unnecessary. 

Vitalik Buterin: “A simple desire to support Bitcoin and make it better; such motivations are unquestionably beneficial…rather, it is a stance that building something on Bitcoin is the only correct way to do things and that doing anything else is unethical. Bitcoin maximalists often use “network effects” as an argument and claim that it is futile to fight against them.”

By no means does this suggest that Bitcoin isn’t a valuable asset. However, competition drives innovation and for a project to prove it’s better than the rest it must produce a product that is better. Useful projects will accrue value no matter what people think about them.

By recognising and analysing market sentiment and the emotional and psychological factors at play, investors can better anticipate market movements, develop strategies to mitigate risks and capitalise on opportunities.