The crypto market has been in a state of panic for the past few weeks. The FTX insolvency and rumors of other exchanges going bust led to a industry-wide selloff. This led many to wonder whether we have finally reached the bottom.
But is this the bottom? Let’s find it out with the help of Basic Market Psychology:
The theory of market psychology suggests that markets are driven by the emotions of all participants. When these emotions reach extremes, it can signal a reversal in the current trend. In the case of the crypto market, we’ve seen extreme fear over the past few months, which has caused prices to crash.
In order to fully understand the different extremes, here are 3 stages of market psychology:
3 Stages of Market Psychology:
1) Capitulation — this is when investors give up hope and sell their assets at any price just to get out of the market. This usually happens near the end of a bear market and signals that prices have reached rock bottom (on the graph above this is the time from Fear until Depression)
2) Bargain Hunting — this is when savvy investors start buying up assets that have been discounted due to the sell-off. This typically signals that the bottom is in and prices are about to start rising again (on the graph above this is the time from Depression until Optimism)
3) FOMO (fear of missing out) — this is when investors start rushing into the market because they’re afraid of missing out on gains as prices start to rise. This usually happens at the beginning of an uptrend and can lead to prices becoming overextended and forming a bubble (on the graph above this is the time from Optimism until Fear)
How To Recognize in Which Stage We Are?
The best way to find out in which psychological state the market currently is, is to look at the Fear & Greed Index. This index measures different factors such as Volatility, Volume, Social Media, Bitcoin Dominance and Trends, and evaluates whether the market is greedy or fearful
Historically, when the market is in extreme greed, it’s best to sell your cryptos
And if the market is in extreme fear, it’s best to buy more cryptos
At the moment the F&G index shows the number 24 which means we are at Extreme Fear. Historically, this has been a good time to buy.
So, what does all this mean for the current crypto market?
Well, we’ve definitely seen signs of capitulation over the past few weeks, with many investors giving up hope and selling their assets at any price. This could be a sign that prices have indeed reached a bottom. Only time will tell if this is truly the bottom or if we’re just in a temporary respite before prices resume their downward spiral.