Psychological whirlwinds of the crypto market: how sentiment becomes a trader's weapon

Cryptocurrency markets are influenced not only by fundamental factors and technical analysis. The human factor — the psychological state of participants, their fears and expectations — plays a significant role. This is the basis of sentiment analysis, which helps understand the mood of the crowd of investors: are they ready to buy or prefer to sell off assets.

Why emotions beat logic in the crypto market

Fundamental analysis relies on evaluating the intrinsic properties of financial instruments considering numerous objective factors. Technical analysis studies price movement patterns. But there is a third element — sentiment, which is the opinion and attitude of investors towards a specific coin, token, or the crypto sector as a whole.

At first glance, the logic is simple: when investors have a positive mood, prices rise. When sentiment declines, quotes follow downward. However, in practice, the emotional nature of the crypto market is much more complex. Dishonest players often manipulate public sentiment, causing beginners to act against their interests.

FUD and FOMO: manipulation through emotions

Two key terms define mass behavior:

FUD (Fear, Uncertainty, Doubt) — a tactic of sowing fear and uncertainty. Through media publications and social media, an informational background is created that causes market participants to doubt the quality of an asset and panic during sales.

FOMO (Fear of Missing Out) — the fear of missing a profitable opportunity. This psychological mechanism pushes traders to make impulsive purchases when prices are already rising, fearing to miss out on profits.

Events, statements, and viral posts online often trigger waves of speculative activity because most participants act under emotional influence rather than analysis. Experienced traders use these emotional surges to trade “against the crowd,” i.e., they do the opposite of what the majority does.

Tools for tracking market sentiment

Funding rates

On futures contracts, you can see the ratio between “long” (buy) and “short” (sell) positions. The principle is as follows: when the futures price exceeds the spot price, funding is positive — a sign of bullish sentiment. If the futures are cheaper, funding is negative, indicating bearish sentiment. By monitoring funding dynamics, one can judge how major traders are positioned at a given moment.

Fear and Greed Index

Crypto Fear Greed Index is a metric that assesses the market’s emotional state on a scale from 1 to 100. The logic is simple: rising prices generate greed (FOMO), falling prices evoke fear (FUD).

The goal of this tool is to protect investors from overly emotional decisions. The classic advice is: buy when the market is in panic, and sell when euphoria prevails.

Social media analysis

Santiment has developed a method for monitoring the crypto sphere through social media. The system tracks mentions of key words on X (Twitter), analyzes the balance of positive and negative comments, and compares these with trading volumes. This allows determining the overall sentiment tone of the community towards specific assets.

On-chain analysis as a window into the market’s soul

Blockchain is an open ledger with all historical transaction data. This has created a new opportunity for analysts: studying investor behavior through transaction flows.

Analysts from Glassnode and other companies classify traders by the age of the bitcoins stored in their addresses. Old coins often belong to long-term investors, while young coins are associated with speculators. By analyzing these flows, it is possible to infer how different categories of traders might act during further price fluctuations of the main cryptocurrency.

Why sentiment is an unreliable tool

Despite the usefulness of sentiment analysis, it is important to understand: market sentiment cannot be considered an independent source of trading signals. It is susceptible to manipulation, often misleading beginners, and serves as a weapon for experienced players. Therefore, applying sentiment analysis requires critical thinking and should be combined with other methods.