Introduction
All of us got to know about cryptocurrencies in the bull run of 2019 and ever since it has been speculated, loved, analyzed, Invested, Traded and, from some, Hated! Bankers have always been bearish about crypto claiming it has no real value.
While the crypto millionaire’s, also in some cases Billionaires, have nothing but praises and respect to this market that changed their lives one and forever. Of all the cryptocurrencies available today, there exists one coin that is seen as a leader, the Godfather of cryptocurrencies, Bitcoin!
Bitcoin started off in the year 2009 when it was been traded for pennies. There was also a story of a person who sold 10,000 bitcoins for 2 pizzas, sounds fair right? 2 pizzas for a coin worth near to zero, well get ready for the next part because numbers are going to get big!!
Soon after the Modern digitalization that started from 2012, Bitcoin has nothing but grew, Grew would be a small word to express that. Anyone who had invested a dollar in bitcoin in 2010 would have had $100,000 today!!! Yes, Bitcoin has grown more than 25000 times. Many a Slumdog millionaire stories were created who either new this would be big or just forgot they had bitcoin until it came into new!! Lucky right.
So then, let’s get started with what is crypto currency and what is fueling this rocket to the moon?!
Cryptocurrency
Crypto currency, aka crypto, has been in the markets ever since 2008’s. There is a common question in crypto markets related to the hen and egg problem. What came first, crypto or Bitcoin? Well to most of our questions we will refer to bitcoin for answers as we all know Bitcoin is the king of crypto!
Ever since the crypto boom of 2019, there have been numerous coins being added every single day. Today if you pick a coin in random and hope it will be the next bitcoin, there are high chances that you are going to make a 50% loss or more. That is how overrated this market has become.
Even after all this, people somehow manage to find gems in the mud. This might not be the case with you, but if it is then Congratulations!!
But looking at the risks involved, should you invest in Crypto? And what are the analysis that you would have to make before investing? Let’s find out!
Movement along the years
Crypto markets have always performed while bitcoin has, means the prices of most of the coins are directly correlated to bitcoins price action. Bitcoin falls, Market falls!
If you look at Bitcoins chart for the past 10 years, you will see that most of the movement came in 2019, A boom that created Millionaire’s overnight out of thin air!!
What was the reason for this gold rush [or more accurately Bit rush]?
1. Institutional interest: Major institutions started showing interest in Bitcoin and started accumulating it.
2. Halving Effect: Bitcoin halving happens every 4 years and it was expected to happen in 2020.
3. Tech Development: Major improvements to Blockchain technology promoted the use of bitcoins in transactions.
4. Economic Uncertainty: Growing instability in geopolitics and trade tensions led to increased investments in Alternate assets.
5. Market Sentiment: Everyone wanted a piece of the action. This lead to increase in the number of individual investors.
So how does sentiment come into play here? What are the sentiments that effect the price?
Sentimental Analysis
Sentiments effect our daily life! I decide to go for a morning run only if I feel good, meaning I wouldn’t want to go when I am sad or weary or tired. Hence it is proved that sentiments play a major role in our lives.
So then, what are the sentiments that affect the markets. Would I stop myself from investing if I am tired? Hypothetically Yes! But this varies from person to person. But some of the major sentiments that run our minds while investing or trading are:
1. Greed: When we see the price moving in a direction there comes a feeling to enter the party and make money. This feeling is greed! Most of the times it is too late to enter a trade.
2. Fear: When you see the price keep moving away there comes a feeling to just hop in at whatever point. You feel like the price will go a lot higher and will miss out on an opportunity to make money. This is also called FOMO [Fear of missing out].
3. Hope: Hope keeps a dying person to try until his last breath. Hope makes a person to enter a trade at a high valuation deluding him into thinking that the prices will go higher.
4. Regret: Any person who has let go of a previous move like this would think he has an opportunity. Since he regrets missing out on the last move, he will want to make sure he is in on this.
These four sentiments keep the power to embark a man on his journey to success or failure!!
Sentimental News Effect
You might have heard the story about Elon musk calling out Dogecoin on social media and the price of dogecoin moving unstoppably. This the effect of news or sentiments in the Crypto markets.
Sentimental news can affect the price of crypto currency in multiple ways:
1. Immediate Reactions: Cryptocurrency markets are highly sensitive to news and events. Positive news, such as regulatory approvals or endorsements from influential figures, can lead to rapid price increases. Conversely, negative news, such as security breaches or regulatory crackdowns, can cause sharp price drops1.
2. Market Sentiment: News can influence the overall sentiment of investors. Positive news can create a bullish sentiment, encouraging more investors to buy and drive prices up. Negative news can create a bearish sentiment, leading to selling pressure and price declines2.
3. Speculative Trading: Cryptocurrencies are often traded by speculators who react quickly to news. This can lead to high volatility as traders buy and sell based on the latest news, causing rapid price fluctuations.
4. Social Media Influence: Platforms like Twitter, Reddit, and news websites play a crucial role in spreading news and shaping market sentiment. Influential figures and large groups of investors can amplify the impact of news on the market2.
5. Herding Behaviour: Investors often follow the actions of others, especially in response to news. This herding behaviour can lead to exaggerated market movements as more investors pile into or out of cryptocurrencies based on the latest news.
Recently, Donald trump, newly elected president of United States, had announced the legalization of Cryptocurrencies under his rule, and this has lead to a crypto boom ever since the election results, pushing Bitcoin beyond $100,000
Conclusion
Sentiments do play a major role in the price movement of crypto currencies. People are social beings and thrive on emotions. It is very hard to exclude emotions to play a role in our trades or investments and hence this has to be considered while investing.
It is better to think in a common man’s perceptive, as of how he will react to this price and decide whether he would be correct or not.
As analysts, it is important for us to analyze, not just the sentiments, but also technical and fundamentals for much more precise trading’s.
Hope you can take home something useful out of this small blog and once again thank you for sticking together until the end.
Written By-
K CHINMAYA SHARMA
Engineering
NMAM Institute of Technology
Capital Market Analyst Intern