Market sentiment is the overall attitude and emotional state of crypto investors and traders, whether they're predominantly fearful, greedy, optimistic, or pessimistic. It's measured through indicators like the Fear and Greed Index, social media trends, trading volume patterns, and funding rates. Extreme sentiment often signals potential reversals: Peak greed indicates market tops where smart money exits, while extreme fear marks bottoms where accumulation opportunities emerge.
Example:
In November 2021, the Fear and Greed Index hit 95 (Extreme Greed) as Bitcoin reached $69,000, crypto dominated mainstream news, and your taxi driver asked which coins to buy. This euphoric sentiment signaled distribution phase. Smart money was selling to overly optimistic retail buyers. Bitcoin subsequently crashed 75% to $16,000. Conversely, in November 2022, the Fear and Greed Index dropped to 8 (Extreme Fear) after FTX collapse as "crypto is dead" headlines dominated. This extreme negative sentiment marked the accumulation phase bottom, offering optimal buying opportunities before the 2024-2025 rally.