Market Psychology

Market psychology and human sentiment have gone hand in hand since the creation of the regulated stock market in the late 18th century. Market psychology is defined as, “the overall feeling among market participants that impels them to buy or sell”. Greed, Expectation, Fear and Doubt are just few words that can be used to describe why individuals feel a particular way about a tradable asset or the market in full.
With the launch of the digital assets known as cryptocurrencies in 2009 and the creation of online exchanges that allow these virtual assets to be traded, the same market psychology holds true. A much noted difference between the traditional stock market and the cryptocurrency market, however, is the outrageous volatility associated with these new assets. In 2018 alone, Bitcoin, the first created cryptocurrency that also constitutes a large percentage of the global market, had a high of around $17,000 per Bitcoin in January, but now stands at around $6,700 per Bitcoin. In this post, we will touch upon a number of factors that affect both human sentiment and market psychology within the global cryptocurrency market.

Market Sentiment Factors

The law of supply and demand, perhaps the most fundamental concept of economics, states that the price of a tradable asset will be determined at the level where the supply, or lowest selling price meets the demand, or highest buying price. Below are few of many different factors that sway human sentiment to either buy or sell a cryptocurrency.
  • New technology implementation – Positive Sentiment. Buy Signal.
  • Listing at a top cryptocurrency exchange – Positive Sentiment. Buy Signal.
  • Exchange Hacking– Negative Sentiment. Sell Signal.
  • Bitcoin Futures Trading – Neutral Sentiment. Buy OR Sell Signal.

A new technology improvement or implementation causes a positive human sentiment because it shows the investor that the development team behind his or her crypto-asset are consistently working to improve the usability, functionality and adoptability of the coin. A great example detailing this statement is the Lightning Network and how it was implemented onto both the Bitcoin and Litecoin blockchains. The Lightning Network is a second layer protocol operating on top of a blockchain that enables faster payment processing, cuts down on fees and “unclogs” the blockchain. Upon the successful implementation of a new technological improvement, investors, traders and even enterprise businesses become curious as to how newly developed solutions can assist with their end goal. As a result, the price trends upward.
Having a cryptocurrency listed at a top exchange (Binance, OkEx, and Huobi are currently the largest by daily volume) will do miracles to the price of a crypto. Once an official announcement is made, the cryptocurrency usually begins to see a large percentage increase on other exchanges it is trading on followed by another large rise once it is officially operating on the newly listed exchange. Early on, FOMO (Fear of Missing Out) tends to take control of both human sentiment and the supply/demand of the coin. Following the listing, the price typically begins to trend down as it begins to normalize. Cryptocurrencies with less than sound use cases and development is sometimes olisted on a top exchange, so it is advised to undergo the proper due diligence prior to investing in a crypto-asset.
Anytime an exchange hack takes place, you are sure to see a down trend in the global market as a result. Depending on the size of the exchange and the amount stolen, this could have a prolonged negative effect on both the human and market sentiment. In ideal world, an exchange hack wouldn’t affect the price of cryptocurrencies as the fundamentals behind these coins and tokens do not change. However, investors and traders believe it is in their best interest to either trade into Tether (a USD stablecoin) or trade into Fiat (USD, Euro, etc.). Uncertainty for the future during these instances will drive human emotion to sell and keep their portfolio balance in a favorable spot. The Mt. Gox exchange hack from a couple of years ago saw the top exchange lose over $400 million. This event rocked the global crypto market and streamlined it into a depression where from February 1, 2014 through March 31st, 2014, the value of Bitcoin had dropped over 30%. While an exchange exploit with a similar magnitude of the Mt. Gox hack is unlikely to occur again, investors and traders remain cautious when dealing with online exchanges.

Bitcoin Futures Trading is still a new revelation where individuals can purchase a contract and establish either a long or short position on Bitcoin in order to make a profit. A long positon is a prediction that the future value of Bitcoin will rise for the duration of the contract while a short position is a prediction that the future value of Bitcoin will decline for the duration of the contract. At this time, analysts and investors are unsure whether there is a positive or negative correlation with Bitcoin futures trading. One theory gaining popularity is that some individuals, while long on Bitcoin, have shorted the future price to make a sizable profit which can be used to invest further in the coin for the long term. Another theory is that regulated futures trading allows for full price transparency as well as increased liquidity. The human and market sentiment with Bitcoin futures trading remains neutral until enough proof has been provided to justify the trading as either positive or negative.