Crowd theory (or behavioral market psychology) studies how collective human behavior affects markets, especially under conditions of uncertainty. The theory states that people in crowds tend to act irrationally, following general sentiment rather than logical conclusions. In the context of financial markets, including cryptocurrencies, this leads to crowd reactions, where mass investor actions determine market movements. Let's look at how this theory plays out in the crypto market.

Basic principles of crowd theory:

1. Emotions dominate rationality: People in crowds are prone to emotions such as fear and greed, which often leads to making hasty decisions.

2. Imitation: People tend to copy the actions of others, which reinforces collective trends, especially when investors do not have complete information about the market.

3. The "FOMO" phenomenon (Fear of Missing Out): Fear of missing out on profits pushes people to start buying up assets at the peak of growth without analyzing the risks.

Application of crowd theory in the crypto market:

1. Bull and Bear Markets: The crypto market is particularly susceptible to crowd influence due to its high volatility and the emotional nature of investors.

In a bull market (rising prices): When prices start to rise, a positive sentiment sets in and many new investors join the market out of fear of missing out on profits. The more people buy, the higher the price rises, creating a snowball effect.

In a bear market (falling prices): When prices start to fall, the same emotions of fear cause panic and people sell assets en masse, which pushes prices even lower.

2. ICO boom of 2017: In 2017, the mass euphoria around ICOs led to many projects, even without real value, raising huge amounts of money. Investors were afraid of missing out on potential profits, which pushed them to participate in any opportunity, regardless of its real value.

3. Terra/Luna Crash and FOMO in 2021: The rise of the Terra ecosystem and its tokens (LUNA and UST) was driven by the massive interest in algorithmic stablecoins. When the project began to fall apart, many investors began panic selling their holdings, triggering a cascading decline.

4. Social Media and its Influence: Platforms like Twitter, Reddit, and Telegram play a significant role in spreading collective emotions. When influential individuals (like Elon Musk) or communities (like WallStreetBets) make statements or act in a certain way, it can instantly trigger a mass reaction in the market.

Examples of crowd theory phenomena in the crypto market:

1. Market manipulation (Pump and Dump): Groups of investors, united in communities, can artificially increase the price of assets in order to then sell them at a higher price. People, seeing the price increase, begin to buy assets en masse, succumbing to the mood of the crowd, which only intensifies the movement.

2. Greed during the euphoria: When the market is growing, newbies start investing en masse without realizing the risks. At the peak of growth, many continue to invest money because they believe that prices will rise forever. This phenomenon was clearly expressed in late 2017 and 2021, when cryptocurrencies reached their peak values.

3. Fear and panic during a fall: As soon as the market starts to decline, the opposite reaction occurs: investors sell assets, fearing further losses. As a result, prices fall even faster. This effect was especially visible in 2018 and in 2022 after the collapse of Terra.

The role of individual behavior:

While the crowd may act irrationally, individual investors who understand the market's behavior patterns can use this to their advantage. For example:

Countertrend investors (who buy when everyone else is selling and sell when everyone else is buying) can benefit from crowd behavior.

Analysts and experienced traders use technical analysis and behavioral psychology to predict the moments when the crowd begins to panic or, on the contrary, enters into euphoria.

Conclusion:

The crowd theory is clearly evident in the cryptocurrency market, where investor emotions play a key role in shaping market cycles. Collective reactions such as fear and greed are amplified by the high volatility and uncertainty of the crypto market, often leading to rapid ups and downs.