Understanding Crypto Market Psychology

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Learn to understand the crypto market psychology and related market cycles. Use the emotions in the crypto markets to become profitable.

Cryptocurrencies have taken the financial world by storm, offering the potential for substantial profits. However, navigating the crypto market isn’t just about charts and technical analysis. Understanding the psychology behind crypto trading is crucial for success.

In this comprehensive guide, we’ll explore the emotions in the crypto markets, the three market stages, the Wall Street Cheat Sheet, and how FUD and FOMO impact crypto market psychology. By the end, you’ll be better equipped to make informed decisions and potentially boost your profits.

Emotions in the Crypto Markets

Understanding crypto market psychology starts with the emotions every single trader has. Moreover, to start being profitable it’s essential to have control over your feelings when markets start acting volatilely. To overcome these emotions, it’s best to acknowledge them first. Therefore, it’s very wise to answer the following question:

What are the Emotions in the Crypto Markets?

Cryptocurrency markets are incredibly volatile, often triggering a rollercoaster of emotions among traders. Understanding these emotions is vital:

  1. Greed: When prices surge, many investors become greedy, fearing they’ll miss out on massive gains.
  2. Fear: On the flip side, fear sets in when prices drop rapidly, causing panic selling.
  3. Hope: Investors hold onto hope that declining assets will recover, sometimes longer than they should.
  4. Regret: Regret occurs when investors make impulsive decisions and later regret not following their strategy.
  5. Excitement: Excitement takes over when crypto enthusiasts anticipate a big win.
  6. Frustration: Frustration arises when traders make losses, and question their decisions.
Emotions during different market cycles
The different emotions and related crypto market cycles

How Does Greed or FOMO Work in the Crypto Markets?

FOMO is the fear of missing out on potential profits when an asset’s price is rising rapidly. It can lead to impulsive buying, often at the peak of a rally.

Let’s start with a practical example of the greed emotion, which mostly occurs by beginners enter the crypto markets. Greed or FOMO relates to the crypto market psychology of chasing shiny objects.

For instance, Robert wants to leave his job and become a crypto trader. He sets aside some starting capital, joins some crypto discord groups, and follows the markets closely. Next, he sees them talking about an altcoin, opens the chart, and sees that the price is rising fast. He buys, goes to take a shower, returns, and sells for a quick profit. He does this again before lunch and strings together a few successful trades. Robert starts to feel confident that he is a talented trader.

So far so good. Robert keeps trading without a system or a plan and is being fooled by a rapidly rising crypto market. The market has rewarded his bad behavior. We know how this story ends — Robert continues to make impulsive trades and eventually loses his capital.

Bitcoin Fear & Greed Index
Bitcoin Fear & Greed Index showing current market sentiment

The Stages of Crypto Market Psychology

Crypto market psychology is a theory that underwrites the price action in any market. Meaning the price is driven by the emotions of all participants. When these emotions reach extremes, it can signal a reversal in the current trend.

The emotions mentioned earlier in combination with crypto market psychology define the direction of a market trend. In order to pinpoint the current market cycle, here are three stages of market psychology:

Stage 1: Bargain Hunting

This is when early adaptors enter the market and start accumulating new assets. At this stage, the market is moving sideways or slightly up for a long time and interest from retail traders is very low.

Overall, the sentiment of the market is mostly fear or even depression and most social media channels(Twitter, Discord, or Telegram) are talking about a bear market. Also, whales(big investors) are using this stage to use the Dollar Cost Averaging(DCA) trading strategy to take a position.

Stage 2: FOMO

The trend of the market is obviously an uptrend and new investors(mostly retail) are rushing into the market. On Twitter(X) new crypto coins are becoming trending topics and all your crypto friends are suddenly making money.

Consequently, fear of missing out is a common emotion and causes rising crypto prices faster and faster. Additionally, market prices are becoming overextended and even forming signs of a bubble. Often this stage starts with optimism among traders and ends with emotions of excitement and thrill.

Stage 3: Capitulation

At this stage, if you still have a position in the markets then it’s time to sell and go on a very long holiday. At the beginning of this stage, the market is already trending down but traders are still having faith in higher prices. Most of the retail traders are still in the markets and are ‘Buying the Dip‘.

Because of the continuous downtrend emotions are rapidly moving from anxiety, and denial to panic and finally capitulation. Traders have lost faith in higher prices and are selling their cryptocurrencies at bargain prices. Finally, this stage ends when the prices reach a bottom and will be trending sideways for a very long time.

Related: Building the Best Long Term Crypto Portfolio: Low Risk Options

BTC price during the Bullrun of 2021
BTC price during the Bullrun of 2021

Wall Street Cheat Sheet

In general, emotions hitting extremes among traders isn’t only a typical thing in the crypto markets. Moreover, it can relate to any asset market and has a tracking history of hundreds of years. Again, any market is driven by emotions and we are all human beings, aren’t we?

A good example to illustrate this is the Wall Street Cheat Sheet. It represents a general chart that visualizes the market psychology of an asset. In addition, it contains 13 market emotions that occur 99% of the time:

  1. Disbelief: As prices rise, the majority still disbelieves the rally.
  2. Hope: A glimmer of hope emerges as prices continue to increase.
  3. Optimism: Investors become more optimistic, expecting the rally to continue indefinitely.
  4. Belief: Belief solidifies as gains persist, and the public jumps in.
  5. Thrill: Excitement reaches its peak as prices skyrocket.
  6. Euphoria: Euphoria is marked by irrational exuberance, often followed by a sharp correction.
  7. Complacency: Investors grow complacent, assuming the good times will last.
  8. Anxiety: Anxiety sets in as prices start to drop, and investors worry about their investments.
  9. Denial: Many refuse to accept the downward trend, hoping for a quick rebound.
  10. Panic: Panic selling leads to a market crash.
  11. Capitulation: Investors give up and sell at any price.
  12. Anger: Anger and frustration are common as investors realize their losses.
  13. Depression: The market hits rock bottom, and investors are in despair.
Wall Street Cheat Sheet: Psychology of a classic market cycle
Wall Street Cheat Sheet: Psychology of a classic market cycle

How does the FUD emotion affect the Crypto Markets?

FUD stands for Fear, Uncertainty, and Doubt. It’s a strategy used by market manipulators to spread negative information or rumors about an asset to induce fear and drive prices down.

Unfortunately, in the volatile crypto markets, this is a common behavior and as an investor or trader, you should be aware of this.

For example, during the bear market in cryptocurrency in 2018/2019, one prominent example of FUD (Fear, Uncertainty, Doubt) was the spread of negative news and rumors related to Tether (USDT), a stablecoin that is pegged to the value of the US dollar.

At that time, there were concerns and allegations circulating in the crypto community that Tether might not have sufficient reserves of USD to back all the USDT tokens in circulation. Some critics claimed that Tether was operating without proper transparency and conducting fractional reserve banking, which could have serious implications for the stability of the crypto market.


These rumors and uncertainties led to fears among investors that if Tether’s value were to plummet, it could trigger a major market crash. As a result, many traders became anxious and started selling their cryptocurrencies, contributing to the overall bearish sentiment in the market.

Best Way To Deal With Losses

Let’s face it: losses are unmistakably related to crypto trading. But how you handle them can make all the difference in your trading journey. So, here’s a simple and effective approach to deal with losses and boost your crypto trading psychology:

  1. Keep Perspective: First things first, remember that even the best traders experience losses. It’s normal. By keeping a cool head and not getting too attached to individual trades, you can avoid emotional decisions. For instance, imagine you invested in a cryptocurrency, and its price suddenly dropped. Instead of panicking, keep in mind that every trader, including the pros, faces setbacks.
  2. Learn from Losses: Treat losses as valuable lessons. Take time to analyze why you lost and identify any mistakes. Adjust your trading strategy and risk management based on what you’ve learned. Every loss can be an opportunity to become a better trader in the long run. So if a trade didn’t go your way, analyze why it happened. Did you miss crucial information? Did you overextend your investment? Use these insights to improve your next moves.
  3. Build a Support System: In tough times, having a mentor or a trading community to lean on is gold. They can offer guidance, share experiences, and provide much-needed support. Knowing you’re not alone can help you stay motivated and focused on your goals. For example, joining some reliable discord servers or seeking advice from an experienced trader can be like having a trusted friend by your side when the going gets tough.
  4. Mindfulness for Emotional Balance: Emotions can run wild in trading. Practicing mindfulness and meditation regularly can help you manage these emotions and reduce stress. It’s like building emotional armor that keeps you calm and focused during challenging times.
Bitcoin Buddha

Mastering Crypto Market Sentiment

So, there you have it. Mastering losses in crypto trading is all about keeping perspective, learning from setbacks, joining the right social networks, and nurturing your emotional resilience through mindfulness. With this approach, you’ll be better equipped to navigate the crypto markets and inch closer to your trading goals.

Conclusion: Using Crypto Market Psychology to Your Advantage

In the exciting world of cryptocurrencies, there’s a simple yet smart crypto trading strategy: Go against the crowd. Here’s how it works, and I’ll use some practical examples to illustrate:

1. Buy Low: When most people are feeling disappointed or scared because cryptocurrency prices are falling, that’s your signal to buy. Think of it as getting a great deal on something you believe will be worth more in the future.

For example: Imagine the price of Bitcoin dropped significantly(30%), and many folks are worried. You decide to buy some Bitcoin at this lower price because you believe it’ll go up again.

2. Sell High: On the flip side, when everyone is excited and rushing to buy a particular cryptocurrency because they think it’s going to skyrocket, it might be a good time to sell. Picture it like selling something you bought at a discount for a nice profit when it’s in high demand.

For example: Let’s say a new Memecoin like Pepe Coin is getting a lot of hype, and prices are soaring. You decide to sell some of your PEPE when it’s at its peak price, locking in your profit.

The Secret Sauce: The secret to success in this strategy is to pay attention to the emotions of the market. When people are overly optimistic, prices tend to be high, and it might be a good time to sell. When fear or disappointment takes over, prices drop, and that can be a good time to buy.

So, remember the golden rule to boost crypto profits: Buy low when others are scared, and sell high when others are enthusiastic. This approach can help you make the most of your crypto investments.

Related: Spot Trading Bitcoin: A Beginners Guide To Profitable Trades


What is A Bull Market in Crypto?

A bull market in crypto is a period when cryptocurrency prices are rising, and optimism is high. It’s like a financial upswing, and many investors are buying because they expect prices to keep going up.

What is a Bear Market in Crypto?

A bear market in crypto is the opposite. It’s a period when cryptocurrency prices are falling, and people are feeling pessimistic. Investors might sell or hold off because they’re worried prices will drop further.

Is the Crypto Market Predictable?

Unfortunately not. The crypto market is unpredictable, like a rollercoaster. It’s influenced by many factors, and even experts can’t always predict its moves. So, while you can analyze trends, it’s important to be prepared for surprises in the crypto world.

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