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The Market Psychology Of Cryptocurrency Trading

Last Updated December 22, 2023 12:22 PM
Andrew Kamsky
Last Updated December 22, 2023 12:22 PM

Key Takeaways

  • Bitcoin’s price reflects the collective decision-making of thousands of individuals, not a single entity’s influence.
  • Market resilience in crypto is based on a broad consensus on price, countering individual manipulation attempts.
  • Consolidation periods indicate a market truce, setting new price ranges post-events.”
  • Understanding market sentiment is a way of understanding prices outside of technical analysis alone.

The following article seeks to demystify the forces behind price movements in cryptocurrency outside of technical analysis. It hopes to reveal the intricate interplay of trader psychology, market sentiment, and technical analysis. 

Understanding sentiment and other psychological elements in markets is essential for traders to make informed decisions, aligning individual strategies with the market’s collective sentiment rather than attempting to beat it. Below are a few concepts that a trader should understand by considering market sentiment:

What Is A Crypto Psychologist?

A Crypto Psychologist is an individual who specializes in understanding the psychological aspects and behaviors associated with cryptocurrency trading and investment. 

This role involves analyzing how emotions, cognitive biases, and decision-making processes influence traders’ actions in the highly volatile and often unpredictable crypto market. Crypto Psychologists aim to spot psychological responses to market trends, manage stress and anxiety related to trading, and develop healthier trading habits. 

By understanding the principles of psychology and linking said knowledge to cryptocurrency markets, the individual will begin to grasp market sentiment. This understanding offers traders insight into making more rational and informed decisions and avoiding common pitfalls like panic selling or irrational exuberance.

Crypto Market Cycles And The Role Of Emotions

Crypto market cycles are characterized by periods of rapid growth (bull markets) and decline (bear markets), often driven by investor sentiment. The Net Unrealized Profit/Loss (NUPL) is a valuable metric in this context, as it provides insight into the overall market sentiment by comparing the current value of cryptocurrencies to the price at which they were purchased.

Emotional Influence on Market Cycles

Optimism And Greed

In a bull market, as prices rise, investors often become overly optimistic. The NUPL  typically shows a high percentage of unrealized profits, reflecting this optimism. This stage is often marked by greed, where the fear of missing out (FOMO) leads to increased buying and speculative investments.

Fear And Panic 

Conversely, during a bear market, the NUPL may indicate a higher percentage of unrealized losses. Fear and panic can set in, especially among those who bought at higher prices. This emotional response can lead to panic selling, exacerbating the market downturn and capitulation.

The NUPL can act as a barometer for market sentiment, helping traders understand whether the market is in a state of profit or loss and understanding the overall sentiment of the market

Behavioral Biases In Cryptocurrency Trading

The psychological patterns traders typically encounter over time, are normal and somewhat beneficial for individuals seeking a long-term trading career. Making mistakes when trading markets is actually an important part of the learning process. 

New traders should begin to understand that experiencing psychological biases is a universal aspect of being a human being. Individuals should not be discouraged by inexperienced trades but be open to rectifying them and most importantly being aware that the individual can hold bias. Traders should embrace the learning opportunities that come with trading markets. Below are three common behavioral biases that most traders end up making: 

Overconfidence bias

Overconfidence may cause traders to downplay risks and believe too strongly in a predictive strategy the individual feels like they have. The market has a way of bringing such overconfidence into check over time, often through financial setbacks.

Confirmation bias 

Confirmation bias can lead to tunnel vision where traders only acknowledge information that aligns with the initial assumptions made by that individual about a cryptocurrency’s prospects. Confirmation bias potentially blinds traders to signals and indicators that could necessitate a strategic pivot, especially when traders are chasing after swift or inflated profits.

Fear Of Missing Out (FOMO)

The impulse of FOMO can provoke late purchases when an asset is in the midst of a rally, and conversely, the bias of loss aversion can lead to a reluctance to divest from depreciating assets in the hope of a turnaround. Recognizing and adjusting for this FOMO bias is important for traders aiming to be successful.

Influence Of Market Psychology On Bitcoin’s Price

The concept that “no one man can make a market” is foundational in understanding the cryptocurrency market dynamics. 

The price of Bitcoin, for instance, is not determined by a single entity but is the cumulative result of thousands of participants, each with unique perspectives and strategies. The market, therefore, is a complex network of collective agreements on the price of a given asset at any given moment.

Exploring Bitcoin’s Market Price Resilience

This democratic pricing mechanism ensures that individual attempts to manipulate the market are short-lived. Whether an individual or a small group of traders are selling a significant amount of Bitcoin in hopes of influencing the market, it can only temporarily impact the asset’s price. 

Behind the visible order book lies a vast array of participants, ready to act when the price reaches what the market considers a bargain, quickly countering any manipulative moves.

What Is Consolidation In Crypto?

Consolidation periods in trading charts represent when buyers and sellers reach a consensus on price. It’s similar to a truce in a tug of war, where neither party has the upper hand. The dust will eventually settle after significant news or market events, and a new acceptable price range emerges. This range is where most trading happens until a breakout occurs, setting a new equilibrium. 

Usually a change in trend is when markets bottom and a breakout occurs, illustrated below in Bitcoin in 2019 with the consolidation period represented as the rectangle in the image below:

BTC/USD Consolidation And Breakout
BTC/USD Consolidation And Breakout

The Inefficacy Of Market Orders

Executing a large market order to sell a cryptocurrency might result in a temporary price plummet. However, if a change in widespread market sentiment does not back this price shift, it is quickly corrected. 

Most traders, who had previously agreed on a higher price range, see this as a discount and start buying, thereby restoring the price to its pre-dump level.

Bitcoin’s Resilience To Dips

Price changes that are sustained typically require the consensus of the majority. Analyzing Bitcoin in bull markets carefully explains the resilience of cryptocurrencies when passing through dips in price. 

Most of the market will not perceive said dips as a change in fundamental value or trend. Thus, investors or traders buy the dip, reinforcing the pre-existing price consensus. Below, one can see how the market buys up every dip during a bull market after price suffers from a 20%-40% dips:

Bitcoin Trend 2016-2018 And Purchase Of Dips
Bitcoin Trend 2016-2018 And Purchase Of Dips

Technical Analysis And Crypto Market Sentiment Awareness

Many traders make the mistake of relying solely on technical analysis and indicators without understanding the underlying market sentiment. Price movement fundamentally reflects collective trader psychology, not just patterns on a chart. It would be wise for traders to become in tune with the market’s overall sentiment. 

When sentiment becomes euphoric, it is historically a good time to sell because greed is high and vice versa when Bitcoin’s price has plummeted significantly. This means when sentiment is marking a depressed state, historically, this has been a good time for traders to enter the market. Traders can take reference to the Net Unrealised Profit/Loss (NUPL) chart in LookIntoBitcoins on-chain analysis to keep tabs on the overall sentiment of the market illustrated below:

Bitcoin NUPL Market Sentiment | Credit: LookIntoBitcoin
Bitcoin NUPL Market Sentiment | Credit: LookIntoBitcoin

Unveiling Crypto Market Truths By Understanding Trends

This article aims to illuminate what lies behind the price charts; this essentially means formulating a narrative based on the overall market sentiment and trader positioning. Market trends are about predicting the future based on past patterns and understanding the collective belief about value and not fighting the movement. 

Prices of assets often move dramatically due to panic selling or stop-loss orders being triggered, but these do not reflect the collective valuation of a trend. Once the panic subsides, prices typically revert to levels where most market participants believe the price should be.

Identifying Ideal Buying Points and Navigating Crypto Market Behavior

The safest buying points on any chart are where there is a significant imbalance in favor of buyers and vice versa for sellers. Often, these points are established after a panic sell, where prices dip below the general market consensus of value. When done alongside the majority who uphold the pre-panic valuation, buying into dips can be the most advantageous. 

A notable instance in Bitcoin’s history where market fear excessively drove down prices, presenting an attractive opportunity for purchasing Bitcoin at a lower cost, occurred during the black swan event triggered by the COVID-19 pandemic in March 2020. Traders who bought the panic were quickly rewarded with higher prices.

Psychological Strategies For Successful Trading

Below are some interesting and long term strategies to better one’s life and as a result make better trades:


Before making any trading decision, an individual should take a moment for a short meditation or deep-breathing exercise to clear the mind of any emotional clutter. 

This approach helps take calm and focused trades with a clean mindset reducing the impact of stress and anxiety on trading decisions is incredibly important.

For example, traders might benefit from going to the gym, going to the sauna, taking ice baths or long runs before entering the market.

Read 50 Books, Listen To Podcasts And Find Mentors

Before diving headfirst into trading, individuals must arm themselves with knowledge. A trader should take the time to educate oneself, reading a wide array of books on trading strategies and human nature, listening to seasoned investors on podcasts, and conducting thorough research on potential assets of interest. 

This strategy will filter out a severe and passionate trader from one that will not be profitable in the long term. This preparatory phase is not merely about accumulating facts but about attaining an understanding that transforms uncertainty into clarity, minimizing stress. 

With a well-informed mind, the individual is better equipped to navigate markets calmly and make rational decisions that are not swayed by emotions, often triggered by market fluctuations. This self-education strategy cultivates a psychological resilience that is indispensable for long-term success in trading.

Start Small And Keep It Fun 

Beginning a trading journey with modest investments is a strategy that pays psychological dividends. Starting small allows time to understand market dynamics and behavioral biases without much collateral damage or overwhelming pressure of financial risk. 

Starting small and making profitable trades is fun, and the act of having fun will spur a trader onwards to become more knowledgeable over time out of curiosity, and as experience and knowledge expand, one can gradually increase the stake. This approach not only preserves capital but also builds confidence. 


In conclusion, understanding the market’s collective behavior, recognizing consolidation zones, and acting when prices diverge from widely accepted values are the hallmarks of confident cryptocurrency trading. 

It’s not about moving the market or fearing manipulation of the market; instead, cryptocurrency trading is about understanding trends and working with the market trend.


What determines the price of Bitcoin in the market?

A single entity does not control the price of Bitcoin. Still, it results from the cumulative actions of thousands of market participants, each employing unique strategies and holding market perspectives. The market is a complex network where prices are a collective agreement at any given moment.

How does market sentiment affect Bitcoin’s price resilience to dips?

The collective sentiment of the majority heavily influences Bitcoin’s resilience to price dips. Suppose most market participants do not view a dip as a fundamental change in value. In that case, they will likely buy the dip, reinforcing the established price consensus and contributing to the asset’s resilience.

What is the significance of consolidation periods in cryptocurrency trading?

Consolidation periods in trading charts are when buyers and sellers reach a price consensus, similar to a truce in a tug of war. Consolidation periods often follow significant news or market events, leading to a new acceptable price range where most trading occurs until a breakout sets a new equilibrium and pivots into a new trend.

How can understanding market sentiment benefit cryptocurrency traders?

Understanding market sentiment is helpful for traders as it offers insights beyond technical analysis. Understanding the collective trader psychology and prevailing market trends helps traders make informed decisions. Recognizing euphoric or depressive sentiments can indicate opportune moments to buy or sell, aligning with the overall market trend for more strategic trading.

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