Robert Steinadler, 21 days ago
Sentiment plays an important role, since markets are not always driven by rational, but rather by emotions. We all know that everybody is super bullish at the top and ultra-bearish at the very bottom, right? Still, many investors are not paying enough attention to the current sentiment and miss out on important insights that can be derived from the data.
Why is $20,000 such an important price level, and why is a neutral sentiment a good sign?
The fear and greed index for Bitcoin is not undisputed. While many other indicators in the realm of trading are somehow related to reliable market data that is coming from exchanges, the fear and greed index is somewhat fuzzy.
The index takes price action and volatility into account as well as momentum, volume and the dominance of Bitcoin in comparison to other cryptos. Search terms on Google Trends as well as a social media analysis is also part of the index. While the first part is related to old-fashioned market data, the last two inputs are more difficult to read. Search terms might change, rise or decline in volume due to a variety of reasons. The same can be said about social media. How to interpret the activity correctly?
Despite the doubts about the reliability of the index it is still reflecting the current market sentiment and in absence of a better solution that is publicly available, the index remains one of the most important indicators in this regard.
After going through a long period of fear, the sentiment finally turned neutral again. Last time the sentiment turned neutral was in August 2022 and ever since the downfall of FTX the sentiment didn’t recover.
The reason for this is the recent price surge and perhaps the fact that the Fed might be willing to go easy on the rate hikes. It appears that in this case, the sentiment is following in the price action. With that being said, it is not indicating that we have entered a new situation. A rally is often carried by an overly bullish sentiment.
In conclusion, the sentiment turning neutral just represents a spark of hope. Investors are still far from reacting irrational. The stablecoin supply reveals that there is still a lot of capital on the sidelines. Therefore, sentiment becomes important. Once that capital is rushing into the market, it could possibly carry the price to a new yearly high in 2023. With order books being thin for the last 3 month, such an event could have an even more drastic effect.
The price level of $20,000 is especially important for Bitcoin. Data from Glassnode reveals that this is the breakeven price for many hodlers and also a price range that allows miners to operate profitable. Of course, this depends on their location and on the respective electricity and maintenance costs that vary regionally.
If a price level of $20,000 is maintained, then an important part of Bitcoin’s ecosystem becomes vivid again. Core Scientific, one of the biggest mining companies worldwide, had to file for chapter 11 bankruptcy, which indicated that they could go out of business and that the rest of the sector could follow. It remains to be seen if Core can restructure if the price level is kept.
In conclusion, the aforementioned price level is important for businesses and the sentiment of investors. If they are convinced that we have seen the bottom in late 2022, the ongoing recovery could last longer. However, there are other factors that need to be considered such as inflation and the response from the Fed after each FOMC meeting.
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