Sentiment in the crypto market: What is it and how to measure it

Crypto sentiment (market sentiment) refers to investors’ attitudes toward a financial asset or the market as a whole. It’s what crypto prices depend on so heavily.

In this article, we’ll break down the main types of sentiment, how they influence the crypto market, and exactly how to use them in your trading to stay in the black. Let’s not waste any time. Let’s dive in!

Types of sentiment

• “Bullish,” or positive—when prices in a certain sector or for crypto assets are rising.
• “Bearish,” or negative—when the market is turbulent and a decline in prices is expected.
• There’s also neutral sentiment, when everything is stable and there’s no particular mood in the market.

At first, it seems easy to track sentiment. For example, there’s a token that’s been falling for a long time. It’s clear that “bearish” sentiment prevails here. But in reality, this process is much more complex.

The thing is, market sentiment is fickle. Today the situation is great, and tomorrow everything is falling—it’s like an emotional roller coaster, and you need to be prepared for it. So, to predict sentiment more accurately, you need to consider a wider range of factors. A trader who can read the “emotion” in the market is one who is always a few steps ahead. 

Indicators used to gauge sentiment

• On-chain metrics, which include several types of statistical data you can extract from the blockchain (number of wallets, holders, project users, TVL, transaction volume, activity of large holders, etc.). If activity is increasing, sentiment is moving toward bullish; if it’s decreasing, toward bearish. Pay special attention to major investors. They usually know more about the market and often influence prices. Even if their actions go in the opposite direction of most small players, this is a good sign, and it’s better to follow the leaders.
• Sentiment on social media. This method of gauging sentiment isn’t particularly effective, but it can serve as a helpful tool. Since many different communities are active on social media today, fresh information and discussions often appear there. So you can monitor which tokens are being discussed and the emotional tone of those conversations.
• Fear and Greed Index. One of the most powerful indices that can truly be used effectively to analyze various projects. Sentiment is predicted based on how the index fluctuates. Greed (60+) – investors are actively buying and expect the market to rise. Fear (up to 40) – there is less investment. How can you use this? If you buy assets at the peak of fear and sell them during greed, you can use the index to lock in profits. 
• Funding rates. Another accurate sentiment indicator. The funding rate is a regular payment between traders (usually every 8 hours) that helps keep the price of perpetual futures close to the spot price. Simply put: if the rate is positive, traders with long positions pay those who are short. If the rate exceeds 0.05% over 8 hours, the market may be flooded with buyers; if it’s negative, the opposite is true—short sellers pay long positions. If the rate is close to zero (±0.01%), the market is in a neutral state.

In summary

Accurately gauging sentiment is a crucial part of investment success. Without it, you’re gambling blindly and turning asset management into a game of slots or a lottery.

A top-tier investor has a feel for the market, which puts them several steps ahead of the rest.