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Psychology Led to a 20% Loss of Bitcoin

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Psychology led to a 20% loss of bitcoin

Around eight days ago, the main cryptocurrency hovered around $ 12,000, leading many to believe that a bullish rally would push the price above last year’s highs and even higher.

The crypto community was ecstatic as Bitcoin showed no signs of bearish sentiment. However, as is often the case, the excitement quickly gave way to disappointment.

As early as September 1, 2020, the bitcoin rate was above $ 12,000, but a day later on Binance, the BTC price dropped to about $ 11,160. And most importantly, the worst was ahead. The next day, September 3, the asset dropped to a low of $ 9,960 and has since traded around the $ 10,000 level, having lost more than $ 2,000, or about 20% of its dollar value (over the week).

Popular cryptocurrency analyst and seasoned trader Scott Melker, better known in the crypto space as the Wolf of All Street, wrote about the contradictory psychology of the market. According to him, at first, people tend to fall into euphoria, then to get bitter sobering up.

Market psychology is a really huge part of trading that many often overlook. However, legendary investor Warren Buffet is well versed in this and has his own judgment on this matter:

Beware when others are greedy and be greedy when others are afraid.

Warren Buffett’s opinion

Buffett’s observation is quite suitable for the situation in the crypto market since there are the same people operating there as in traditional markets.

When people start buying an asset, prices rise sharply, and this is when investors should be careful if they are not willing to overpay. On the other hand, when some are afraid to act, others get a good opportunity for maneuvers.

One of the indicators that should be considered when “measuring” market psychology is the fear and greed index. It tracks volatility, market dynamics, and volume, social media sentiment, polls, trends, and dominance.

The above chart perfectly illustrates the behavior of market participants and shows that a serious crash happens whenever the index is in the “extreme greed” zone. Case in point: On September 2, the index was at 83 times, indicating extreme greed just before the market crashed.

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