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Key Takeaways

Optimism, greed, fear, and panic, rooted in neurological processes, shape market sentiment and are directly related to uptrends and downtrends. 

Psychological pitfalls like FOMO, loss aversion, and cognitive dissonance often lead traders and investors to make irrational decisions. 

Social platforms can further amplify emotional swings, while mirror neurons contribute to collective behaviors, herd instinct, and speculative trading.

Introduction

Warren Buffett once said, “The market is a device for transferring money from the impatient to the patient.” This simple statement highlights just how much emotions and psychology drive market behavior. At the core of this idea lies market psychology, an important concept in behavioral economics that explores how the collective emotions of market participants shape financial markets. But what about the neurobiology that shapes market psychology itself? 

Neuroscience tells us that our brains aren’t as rational as we’d like to believe, especially when money is involved. Emotions, cognitive biases, and psychological processes often steer our financial decisions in ways we might not even realize. 

For instance, the amygdala is the part of the brain that processes fear and triggers fight-or-flight responses. It can push us to make impulsive decisions during market downturns. On the other hand, the ventromedial prefrontal cortex, which evaluates rewards, can fuel overconfidence during bull markets. 

These brain mechanisms, while essential for survival, often lead us to act on instinct rather than reason when it comes to trading and investing.

How Psychology Drives Market Cycles

Uptrend

Optimism is widespread during a bull market. Rising prices generate excitement, and neurobiology tells us that this triggers the brain's reward system, releasing the neurotransmitter dopamine. 

Emotional phenomena like FOMO (fear of missing out) tend to amplify this trend. FOMO stems from the brain’s social reward pathways, as we’re physically wired to seek inclusion and avoid missing opportunities. Social media platforms like X and Reddit can exacerbate FOMO by showcasing stories of massive gains, encouraging others to buy assets without fully understanding the risks.

Dogecoin, Shiba Inu, and most recently, the TRUMP and MELANIA meme coins serve as prime examples. The value of meme coins, in most cases, is driven by speculative hype and viral trends rather than intrinsic value. Traders are often swept up in the euphoria, ignoring warning signs like overvaluation or unsustainable growth.

Several neurobiological processes coincide to create this unchecked optimism, which can lead to financial bubbles, where prices far exceed an asset’s true value. When the bubble bursts, the market enters a downtrend, often triggering a cascade of negative emotions.

Downtrend

When the market reverses, emotions shift from optimism to denial and fear. The brain’s amygdala, which processes fear, takes over, prompting instinctive responses like panic selling. Neurologically, this fear is magnified by the loss aversion bias, which causes losses to feel more painful than equivalent gains feel rewarding.

As prices continue to fall, fear turns into panic, leading to capitulation, a point where investors sell their holdings en masse, often at significant losses. This behavior is particularly evident during bear markets, as seen in Bitcoin’s sharp corrections during the 2022 market cycle.

The market eventually stabilizes as pessimism peaks, often leading to an accumulation phase where prices move sideways. At this point, some investors may cautiously reenter the market, driven by reemerging feelings of hope and optimism.

Neurobiology Behind Market Psychology

A series of complex neurological processes shape the psychology behind market trends. One such process is the reward pathway, which consists of various neurotransmitters and brain structures.

The main neurotransmitter associated with rewards and pleasure is dopamine. When you are exposed to a rewarding stimulus, your brain responds by releasing increased dopamine. This is typically seen during bull markets, where the brain’s dopaminergic pathways are activated by the anticipation of financial rewards, thus creating a feedback loop. 

Source: Simplypsychology.org

Dopamine is primarily synthesized in the substantia nigra and ventral tegmental area. As seen above, there are multiple dopamine pathways through which dopamine travels to different regions of the brain.

The pathway most associated with market psychology is the mesolimbic pathway. The mesolimbic pathway connects the ventral tegmental area to the limbic system, which includes the amygdala. This pathway is central to experiencing pleasure and reward. In anticipation of receiving a financial gain, dopamine is released into this pathway, creating a sense of motivation and satisfaction.

The primary structure involved in processing emotions like fear and anxiety is the amygdala. The amygdala is as significant during bear markets as dopaminergic pathways are during bull markets. Typically a survival mechanism, the fight-or-flight response in financial contexts can lead to impulsive decisions, often resulting in losses.

While fear and anxiety triggered in the amygdala can distort decision-making processes and result in impulsive decisions like panic selling, cognitive dissonance can also influence investors to hold onto assets in denial, hoping that the market may recover. 

Cognitive dissonance is experienced when the beliefs held by traders about the market conflict with reality. Cognitive dissonance is primarily associated with the prefrontal cortex, responsible for higher-level cognitive functions, and the limbic system, which again includes the amygdala and the hippocampus.

Another interesting aspect of neurobiology that may influence market psychology is mirror neurons. These neurons are found in several areas of the brain, including the premotor cortex, the supplementary motor area, the parietal lobe, and the inferior parietal lobe. Mirror neurons fire both when an individual performs an action and when they observe a similar action performed by someone else.

In essence, mirror neurons allow us to experience the emotions and actions of others vicariously. These neurons are involved in empathy and social influence. Watching other traders succeed can trigger these neurons, leading to imitation, which may play a major role in herd instinct.

TRUMP Meme Coin: A Case Study

1. Rapid growth and the dopaminergic pathways

There is a good chance the explosive growth of the Trump meme coin at launch was influenced by the brain’s reward system. Factors like the clear connection to Donald Trump, a widely recognized figure of wealth, and the significant media coverage surrounding the coin likely contributed to its initial surge.

FOMO and the general thought of missing out on potential rewards was also a possible driver. This initial surge likely triggered the dopaminergic pathways of traders, releasing dopamine in anticipation of financial rewards and thus creating a feedback loop of excitement and speculation. This phase is also commonly referred to as the euphoria stage, where optimism and excitement fuel a price increase.

2. Herd instinct and mirror neurons

As discussed earlier, mirror neurons often play a role in herd instinct, and, thus, market psychology. The coin’s rapid growth may serve as an example of these neurons in action as individuals, influenced by the emotions and perceived success of others, may make decisions driven by collective sentiment rather than rational, independent analysis. In the case of TRUMP:

Meme culture: Memes and social media activity created a viral buzz that encouraged others to join the trend. Mirror neurons may have amplified positive emotions among traders and investors. 

Political and fanbase engagement: Trump’s political supporters and fanbase further propelled the coin’s visibility and adoption. A positive market sentiment is rapidly spread through these social interactions. 

This highlights how mirror neuron-powered herd instinct, amplified by social influences like meme culture and fanbase engagement, can drive market behavior.

3. Volatility, panic selling, and the amygdala

Following its initial surge, like most meme coins, TRUMP also experienced a great deal of volatility and sharp price drops. At this stage, traders may experience denial, fear, and anxiety. 

Cognitive dissonance may lead many to hold onto their assets despite the market's downturn, hoping for a quick recovery or faith in a particular figure. This conflict between reality and personal belief can result in irrational decisions and financial losses.

Meanwhile, the amygdala, which is responsible for the fight-or-flight response, may amplify feelings of fear and anxiety and thus drive panic selling. The announcement of the competing MELANIA coin likely heightened these emotional reactions and underscores how external factors can strongly influence individual investor behaviors and, as a result, market trends.

Closing Thoughts

Understanding the psychology behind market cycles can be highly valuable, providing better context of market trends to traders and investors. For example, you can observe emotional trends to spot periods of intense pessimism or optimism and see how such emotions affect market prices.

Being familiar with the neurobiological processes that underscore emotional trends, including the role of dopaminergic pathways, structures like the amygdala, and the function of mirror neurons, can give you a more in-depth understanding of market psychology. This may increase your chances of avoiding common psychological pitfalls like cognitive biases, FOMO, panic selling, and cognitive dissonance.

Further Reading

What Is the Official Trump Meme Coin (TRUMP)?

What Are Behavioral Biases and How Can We Avoid Them?

Five Risk Management Strategies

Disclaimer: This content is presented to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Where the article is contributed by a third party contributor, please note that those views expressed belong to the third party contributor, and do not necessarily reflect those of Binance Academy. Please read our full disclaimer here for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not liable for any losses you may incur. This material should not be construed as financial, legal or other professional advice. For more information, see our Terms of Use and Risk Warning.

Key Takeaways

M2 (money supply) is a way to measure how much money is moving around in the economy. It includes money that people use every day, like cash and money in checking accounts.

M2 also includes money that isn’t used as often but can still be spent fairly quickly, like savings accounts and money market funds.

M2 is an important economic indicator because it helps economists and policymakers understand how much money is available for spending and investing.

What Is M2 (Money Supply)?

M2 is a way to measure the total money circulating in an economy. It includes both highly liquid money, such as cash and checking deposits (M1), as well as less liquid assets, such as savings accounts, time deposits, and money market funds.

Economists, government officials, and investors look at M2 to understand how healthy the economy is. If there’s a lot of money out there, people and businesses are more likely to spend more. If there’s less money available, spending will naturally slow down.

What Is M2 Made of?

The US Federal Reserve calculates the M2 using multiple components, including cash and money in checking and savings accounts. It also includes certificates of deposits (CDs) and other assets that can be easily converted to cash.

1. Cash and checking accounts (also called M1)

This is the most basic and liquid form of money. It includes:

Physical currency (coins and paper money).

Money in checking accounts, which can be used with a debit card or checks

Traveler’s checks (less common today but still included in M1).

Other checkable deposits (OCDs). These are highly liquid accounts that can be used to make payments by check or debit card.

2. Savings Accounts

These are bank accounts where people keep money they don’t need right away. While savings accounts usually pay interest, they can have limits on how often you can take money out.

3. Time deposits

These are also called certificates of deposit (CDs). You agree to leave your money in the bank for a certain amount of time, and in return, the bank pays you interest. These deposits are usually under $100,000.

4. Money market funds

These are a type of mutual fund that invests in safe, short-term investments. They usually offer higher interest than savings accounts but have some restrictions on how you can use your money.

How Does M2 Work?

M2 reflects the total money available in an economy, including funds that can be easily converted into cash. If M2 is growing, it means more money is available. People might be saving more, borrowing more, or receiving more income. This often leads to more shopping, investing, and business activity.

If M2 is shrinking or not growing much, it may suggest that people are spending less or saving more. With less money in circulation, the economy tends to slow down. Businesses may earn less, and unemployment may rise.

What Changes M2?

1. Central bank decisions

Through monetary policies, central banks manage interest rates and set rules for how much money banks must keep in reserve. When the Fed lowers interest rates, borrowing becomes cheaper, meaning people and businesses are more likely to take loans, adding money to M2.

2. Government spending

If the government gives out stimulus checks or boosts public spending, that can increase the money supply. The opposite is true if the government cuts spending or raises taxes.

3. Bank lending

When banks give out more loans, money is created and added to the economy. This increases M2. When banks lend less, M2 may grow more slowly or even shrink.

4. Consumer and business behavior

If people and companies decide to save more and spend less, the money sits in savings accounts instead of circulating. That can slow down M2 growth.

M2 and Inflation

When more money is available, people and businesses tend to spend more. If this spending grows faster than the economy’s ability to produce goods and services, prices may rise, leading to inflation.

On the other hand, if M2 stops growing or starts shrinking, inflation may slow down. But if it shrinks too much, it could also mean the economy is slowing or even heading into a recession.

That’s why central banks and policymakers watch M2 closely. If they think M2 is growing too fast, they might raise interest rates to cool off the economy. If it’s shrinking too much, they might lower rates to encourage spending.

How M2 Affects Financial Markets

M2 has a significant impact on financial markets, including cryptocurrencies, stocks, bonds, and interest rates.

Cryptocurrencies

When M2 is rising and interest rates are low, some investors may move money into cryptocurrencies, looking for higher returns. During periods of easy money, crypto prices often go up. But, if M2 contracts and borrowing becomes more expensive, people may pull out of riskier assets like crypto, causing prices to drop.

Stocks

The effects of M2 on stocks are similar to those of crypto markets. When M2 is growing, people have more money to trade or invest in stocks. This tends to push prices up. If M2 slows down or shrinks, markets are more likely to fall.

Bond market

Bonds are often seen as safer investments. When M2 grows, and interest rates are low, bonds usually become more attractive as investors look for more reliable returns. If M2 shrinks and interest rates rise, we can expect bond prices to fall.

Interest rates

Interest rates often move in the opposite direction of M2. If M2 is growing too fast, central banks might raise interest rates to slow things down and fight inflation. If M2 is shrinking too much, they may lower rates to support spending and borrowing.

A Real-Life Example: COVID-19 and M2

During the COVID-19 pandemic, the US government sent out stimulus checks, increased unemployment benefits, and the Federal Reserve lowered interest rates. All of this led to a huge increase in M2.

By early 2021, M2 was growing by nearly 27% compared to the year before. This was a record-high increase. But in 2022, as the Fed raised interest rates to fight inflation, M2 growth slowed down, turning negative in late 2022. That contraction signaled a cooling economy and a potential decline in inflation.

Why M2 Matters

M2 is a simple but powerful tool for understanding the economy. If it’s growing fast, it could mean inflation is coming. If it’s shrinking, it could be a warning of slower growth or even a recession.

People who make decisions about interest rates, taxes, and spending use M2 to guide their choices. Investors also watch M2 to get a sense of where markets might be headed.

Closing Thoughts

M2 is more than just a number. It shows how much money is in the system and ready to be used. It includes everyday money like cash and checking accounts, plus near-money like savings and CDs.

Watching M2 helps us understand where the economy might be going. Fast growth can bring more jobs and spending but also higher prices. Slower growth might help control inflation but can also slow down businesses.

Further Reading

Interest Rates Explained 

What Is Monetary Policy?

What Are Bonds and How Do They Work?

This article is for educational purposes only. This content is presented to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Products mentioned in this article may not be available in your region. Where the article is contributed by a third party contributor, please note that those views expressed belong to the third party contributor, and do not necessarily reflect those of Binance Academy. Please read our full disclaimer for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not liable for any losses you may incur. This material should not be construed as financial, legal or other professional advice. For more information, see our Terms of Use and Risk Warning.

Key Takeaways

Tariffs are taxes that governments put on imported goods. The idea is to make foreign products more expensive so that local businesses can compete better. 

In the short term, tariffs often create uncertainty and market volatility. Depending on how they are announced and implemented, investors may get out of riskier assets like stocks and crypto, leading to price drops.

Tariffs on imported mining hardware and semiconductor chips may also increase operational expenses for miners who rely on imported products.

In the medium and long term, there is a possibility of crypto assets, in particular Bitcoin, becoming more attractive as a hedge against inflation and weaker fiat currencies.

What Are Tariffs?

Tariffs are taxes imposed on imported goods and services, often used by governments to protect domestic industries, generate revenue, or retaliate against perceived unfair trade practices.

While they can provide short-term advantages for specific industries, tariffs may also lead to increased prices for consumers and businesses, trade tensions, and economic disruptions.

In a globalized economy, tariffs affect not just the industries directly targeted but also the broader financial markets. They can influence inflation rates, investor sentiment, and supply chains, which in turn can affect currencies, commodities, and cryptocurrencies.

The Role of US Tariffs in Global Trade

The United States has frequently used tariffs as a trade policy tool, particularly under the Trump administration, which imposed sweeping tariffs on goods from China, the European Union, Canada, and other trading partners. The recent "Liberation Day" tariffs of 2025 have intensified global trade disputes, affecting major industries and financial markets.

These policies have already affected industries like manufacturing, technology, and agriculture. But what about crypto? Even though digital currencies don’t work the exact same way as traditional financial assets, they still react to economic changes. Let’s take a closer look at how tariffs can impact the crypto world.

How Tariffs Can Influence the Crypto Market

The impact of tariffs on financial markets and cryptocurrencies can vary greatly depending on how they are calculated, announced, and implemented. There may also be a significant difference between short-term and long-term market reactions.

For example, in the short term, markets may react negatively due to rising levels of fear, uncertainty, and doubt. But that doesn’t necessarily mean investors will continue to be bearish in the long term. It depends, among other things, on how clearly the governments communicate their plans and how well these plans are executed.

1. Investor sentiment and market volatility

Tariffs create economic uncertainty, leading to volatility in financial markets. Cryptocurrencies, particularly Bitcoin, have often been perceived as high-risk assets. Rising trade tensions impact market sentiment, causing investors to move their capital away from crypto assets toward safer options like gold or government bonds.

For example, in 2025, following the announcement of increased US tariffs on Chinese imports, bitcoin’s price experienced a sharp decline. This suggests that, in the short term, tariffs can negatively impact cryptocurrency prices as uncertainty increases and investors become more risk-averse.

2. Inflation, interest rates and crypto prices

Higher tariffs typically lead to increased costs for imported goods. In situations like this, companies usually pass the extra costs onto consumers, making everyday goods more expensive and leading to inflation.

To fight inflation, central banks, including the Federal Reserve, often raise interest rates. Higher interest rates make borrowing money more expensive, which means less cash is flowing into investments—including crypto.

But there’s another side to this. If inflation gets really bad and people lose trust in traditional currencies, they might turn to crypto, especially Bitcoin, as a way to protect their money. In countries with hyperinflation and weaker economies, this has already happened.

The long-term effect depends on how aggressively central banks respond to tariff-induced inflation and whether crypto investors view bitcoin as a good store of value similar to gold.

3. Crypto mining costs could rise

Many cryptocurrency mining operations rely on imported hardware, particularly from China, where a significant portion of ASIC miners and GPUs are produced. 

If the US places higher tariffs on Chinese tech products, it could drive up the cost of mining hardware, making it more expensive to run a mining operation. This could also encourage miners to relocate to regions with lower operational costs and fewer trade restrictions.

In addition, if tariffs target semiconductor chips (which are crucial for mining rigs), the impact could be even bigger. 

4. Currency devaluation and crypto adoption

In certain cases, trade wars and high tariffs can weaken national currencies, making cryptocurrencies a more appealing alternative. In countries experiencing rapid currency devaluation, citizens often turn to bitcoin and stablecoins to preserve wealth.

For instance, when Argentina and Turkey faced economic instability, their crypto adoption rates surged as residents sought alternatives to depreciating local currencies. If US tariffs lead to similar economic instability in affected countries, crypto adoption could rise in the long term.

Is Bitcoin a Safe Haven or Just Another Risky Asset?

Some investors treat it like a "safe haven" asset—especially the early adopters. Others see it as a speculative investment that’s as risky as stocks.

Historically, Bitcoin has followed stock market trends during periods of economic stress. When the stock market drops due to tariffs, Bitcoin often does too. But if the global economy worsens, Bitcoin could take on more of a "gold-like" role, attracting investors looking for a hedge against inflation and currency devaluation.

The long-term impact of tariffs on bitcoin depends on whether it is seen primarily as a speculative asset or as a hedge against macroeconomic risks.

Closing Thoughts

While tariffs mainly target goods and services, their effects go far beyond that. They can shake up investor confidence, drive up mining costs, and even push more people toward digital assets. Trade policies can certainly influence how people invest, where companies do business, and even what kinds of currency people trust. 

In the short term, increased uncertainty can lead to price drops as investors move away from risky assets. In the medium and long term, there is a possibility of Bitcoin becoming more attractive as a “store of value” asset.

Further Reading

Is Bitcoin a Store of Value?

What Is Monetary Policy?

What Is the Crypto Fear and Greed Index?

This article is for educational purposes only. This content is presented to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Products mentioned in this article may not be available in your region. Where the article is contributed by a third party contributor, please note that those views expressed belong to the third party contributor, and do not necessarily reflect those of Binance Academy. Please read our full disclaimer for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not liable for any losses you may incur. This material should not be construed as financial, legal or other professional advice. For more information, see our Terms of Use and Risk Warning.