When it comes to trading cryptocurrencies, traders need to consider things other than fundamental and technical analysis. Market sentiment is a key variable, so it is very important to understand the psychology behind price movements.
Those who are just starting to trade cryptocurrencies should be aware that many times the prices of cryptocurrencies go up or down for no apparent reason. Sometimes this market is driven by emotions and can cause spikes in volatility. Here are some basic mechanics that every trader should know when trading digital assets.
Crypto Prices Subject to Speculation
Because cryptocurrency has yet to be widely adopted, these digital assets have no intrinsic value. That means its valuation is driven by overbuying (during a bull run) and overselling (in a bear market). Basically, those who are active in the market are motivated to buy mainly because the prices are going up.
The experts working for InvestOFund believe that this is the fundamental reason that leads to boom and bust situations. When looking at long-term price trends, it is easy to notice that there is a 1-2 year period during which cryptocurrencies rise, only to be followed by a sharp downward reversal.
Therefore, a speculative asset becomes risky and its price is difficult to predict. This is common in a market that has yet to mature and does not benefit from large institutional flows, unlike other established markets such as stocks, indices or commodities.
Common Emotional Reactions Traders Have
FOMO (fear of missing out) is a common emotional reaction seen in the cryptocurrency market when prices are rising. As currencies grow in valuation, those waiting on the sidelines fear missing out on an uptrend. They go in and buy cryptocurrency, driving the price up a notch. Such conditions occur when there is increasing market optimism and most cryptocurrencies are experiencing gains.
On the other hand, FUD (Fear, Uncertainty, and Doubt) is a negative market reaction seen when cryptocurrency prices are falling. Market participants who bought early or entered the market during the late stage of the rally now face downside valuations. Your profits evaporate, so a decision must be made fast.
When prices turn south, investors are in for a challenge. That is why there is a growing interest in financial derivatives based on digital assets. runners like invest hedge cryptocurrencies, making it easy to trade price movements, without exposure to the underlying tokens.
Patterns that reinforce themselves
Both FOMO and FUD they act as self-reinforcing patterns, regardless of the market structure (bullish or bearish). When prices rise, buyers waiting on the sidelines enter higher and higher levels, not wanting to miss out on the rally. Eventually, the uptrend ends and fear takes over the market.
As prices fall, a cascade of selling ensues, further exacerbating the downward movement. Since emotions play an important role in the direction of prices, traders must learn to read the market's mood and act accordingly.
