Market Psychology – where are we and why does it matter [SERIOUS]
5 min read
With this post I want to talk & explain summarized why Market Psychology is a major driver for the price and where we currently are. I will keep it as short and simplified as possible.If you have any questions or something to discuss I don’t mind going further into details in the comments.
Market Psychology Cycle
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This chart is a classic. It describes the market psychology related to the price of an asset. Market Psychology can be seen as reactive sentiment of investors following price performance of an asset. Usually market psychology has historically strong connections to point of maximum financial risk ( buy high ) & point of maximum financial opportunities ( buy low ). Interestingly, it had a lot of common with the BTC/USD chart in the past when it comes to the volatile highs but also a followed sharp decline.
2013/2014 run
2017/2018 run
2020/2021 run
The huge misunderstanding
There is a huge misunderstanding that I’ve observed in the crypto community even shared by larger known Crypto names. It can be applied to almost all assets nowadays, but people are too focused on the price when it comes to these kind of charts. They see the above psychology chart ( which is just an example ) and expect it to be an indicator for price prediction. But all the chart describes is the sentiment reaction based on price action that already happened.
Here’s a more realistic and accurate when applied to the current BTC/USD chart:
And here’s why – a quick flashback to the early stages of the Bear Market
Those that held BTC through the entire of 2021 can probably agree that within weeks the market psychology shifted very quickly due the abrupt fall in price of the assset. Once we fell from 69k in late 2021 I remember how everyone was convinced “we just need to cool off for the next rally” at the 60k range. Everyone was convinced it’ll go to 100k.
Right after we got hit with the 50k range. People on high leverage are getting anxiety. “Why am I getting margin calls? This dip is taking longer than expected.” fits this condition perfectly. Everyone was still bullish, very convinced this is just “a dip” before the 100k rally.
But then early 2022 happened and BTC completely washed out all over leveraged positions with a flush down to 33k. A huge denial phase for the next weeks happened after. Everyone was convinced “my investments are with great companies ( alt coins ) they will come back.
And it indeed, after volatile weeks, almost got back to 50k. The “belief” stage was back and investors were convinced “the bottom is in just like early 2021”. But the stock market, macro economic factors and the war gave it a reality check.
Then Luna UST happened, the creditor wash out and everyone entered panic phase. “Everyone is selling” and the sentiment overall was starting to shift very bearish. People started questioning their investments. A further sell off happens over the weeks and a lot of investors capitulated. “I’m 100% getting out of the markets. I can’t afford to lose more.”
And then FTX happened. The lowest point BTC has reached. With a spot price dropping below $15,500 we’ve entered the “anger phase“.
“Who shorted the market? Why did the government allow this ( FTX ) to happen?” fits very perfectly here. BUT people were still buying. Crypto wasn’t “dead”. There was no true depression but even a bit hope left. The interest was still there, people bought the dip and even many alt coin investors were convinced this is nothing in the long term and will recover. A true depression is when you barely hear about crypto, price keeps declining because people give up, everyone is questioning if they have become the exit liquidity – just like 2018/2019.
Instead, BTC had a recovery in early 2023 and I remember exactly how everyone was convinced “this is a sucker’s rally” that will lead to nothing. Many were still convinced we will see 14k, 12k or even 10k BTC.
This fits perfect the market psychology of disbelief. And since the 30k Range people are back in the “hope” phase of buying every dip and being convinced new lows won’t happen / bottom is in.
But here’s where a common mistake happens
You might have noticed that the example I gave above is more mixed, doesn’t have a “depression” part and doesn’t 1:1 follow the graphic ahead of it.
Everyone thinks the market psychology is attached to price therefore believes it can predict future prices and the next phases are optimism, belief and an overall bullish scenario. Reality is, market psychology is independent from price action. The sentiment, especially around a volatile asset like crypto, can quickly change and nothing guarantees we are back on track to new highs nor that this was a top and we go back to new lows.
There’s also a huge difference between BTC chart & sentiment compared to the alt coin market.
A good example why the pattern doesn’t always plays out is the Alt coin chart:
This was something special many haven’t noticed over the last months. The alt coin market almost hit a new low below the FTX levels. This was mostly caused by uncertainity due regulations and I think we can all agree we are far detached from BTC “Hope” sentiment when it comes to alt coins.
I personally would estimate the psychology around alt coins right now in a “denial” phase. Not saying new lows are ahead nor that there isn’t a potential recovery coming.
It just perfectly shows that there’s no direct connection between psychology of a market cycle and the price. Denial fits perfectly here as many are convinced, their investments are with great assets and they will come back next bullrun.
Conclusion & TLDR:
Market psychology is a major driver of any asset and any market cycle. They have a direct impact on volatility and local price action which causes heavy sell offs ( fear ) but also non stopping rallies ( greed ). A major mistake however, is that a lot of people are convinced the market psychology cycle can be used to predict prices. There is no direct connection between market psychology and future price action, but market psychology is a reaction on current price action instead.
You can use this information to have a rough estimate where the crypto sentiment is right now and where the maximum point of financial opportunity is but also to avoid buying the point of maximum financial risk based on market psychology & sentiment. At the end of the day, markets remain person vs person. When you hit that buy button, somebody else sold.
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