Sentiment is such a critical part of financial markets in general, to the point that some people have claimed that the only two factors that matter when it comes to markets rising and falling are fear and greed.
This is especially the case when it comes to crypto conversion, with this sentiment leading to both unbelievable rallies and just as sudden drops.
For example, CoinMarketCap has reported that the market has dipped into the fear side of the Fear and Greed Index for the first time in nearly half a year.
This is a result of some extremely sudden swings in the crypto market, including Bitcoin falling not only below six digits but to a low of $93,000 before rebounding, with The Independent pointing out that this caused the market as a whole to lose half a trillion dollars in value.
Part of the reason for this is that unlike any other financial market, crypto never sleeps; you can buy, sell and trade at any time, which means that there is no time for the market to settle and no circuit breakers to stop runaway surges and runaway crashes.
This means that, unlike even forex (which only trades for five and a half days a week), the volatility caused by market sentiment, news events and contagion can spread quickly, and market sentiment is extremely powerful.
No three words strike fear into the hearts of investors quite like fear, uncertainty and doubt, often known simply as FUD. Why is this the case, and why does fear have such a strong effect over market sentiment.
Fear Is The Mind-Killer
The 1965 science fiction novel Dune features a passage known as the Litany Against Fear, which described fear as “the mind-killer” and the “little death” which brings with it “total obliteration”. The powerful effects of fear have been seen a lot in the cryptocurrency world.
The term fear, uncertainty and doubt has existed with that wording as far back as 1693, but its modern description and acronym was coined in 1975, often referring to somewhat dubious disinformation tactics used by technology companies to make potential customers distrustful of rivals.
In the financial and cryptocurrency world, FUD is a term with several definitions. Whilst it initially was used to warn people that certain pieces of information and news stories were framed and designed to scare people into selling, it tends to more broadly talk about the factors which cause negative market sentiment.
Sentiment is the lifeblood of many cryptocurrency projects, and in some more volatile and unstable projects is the only factor in maintaining those price increases.
As a result of this, anything that could hurt market sentiment, either as a whole or in specific relation to a given project might make people reconsider their investment and look into exiting.
This lowers the price, causing more people to leave and the sell-off continues until someone either buys the dip or the price goes to zero.
It is the opposite effect to the Fear of Missing Out (FOMO), but both have a powerful effect on the market for the same reason that Frank Herbert called fear “the mind-killer”.
Fear is an emotion that can lead to people feeling they must make a time-critical decision now without giving it the care and consideration it not only needs but that they are, despite how they feel in the moment, able to give it.
FOMO makes you jump onto a hot new project without being sure if it is actually the right investment at that price and without preparing an exit strategy, risk management or any due diligence notes.
By contrast, FUD makes you sell quickly, often losing money in the process, and might potentially cause you to miss the next optimal buying period for fear that the market will continue to stumble.
If a single investor does this, they are the only one to lose out, but there is a snowball effect that often occurs during a bear market, where fear becomes contagious and people who might not have been swayed by the initial wave of negative sentiment are forced to sell once the prices drop further for fear of margin calls.
This often leads to a flight to quality, which in the wider market typically means moving to gold or other stable liquid commodities, but within the crypto market typically means buying a more established and stable token such as Bitcoin or Ether, rather than an altcoin such as Dogecoin or HAWK.
There has been a rebound, at least when it comes to Bitcoin, but the sell-off showed how much power sentiment still has over the market.