Everything You Need to Know About Crypto Fear and Greed Index
As much as investing requires a clear head and thrives on research, human emotions still play a significant role in the financial space. And just as analysts use market sentiment to gauge if a bull or bear run is imminent or in full swing, the Crypto Fear and Greed Index is used to gauge human emotional responses.
This index is a powerful tool that crypto investors rely on to make informed investment decisions. Given its importance, we will explore the Crypto Fear and Greed Index, its benefits, and how it is formulated.
What Is the Crypto Fear and Greed Index?
CNN's Business division developed the Fear and Greed Index to cater to stock market sentiment. CNN's idea tried to capture how much investors were willing to pay for stocks. The index is based on two primary human emotions—fear and greed—used in making investment decisions. Given its popularity, the idea has since been incorporated into the crypto market.
The Crypto Fear and Greed Index principally captures the Bitcoin price by gauging it along the lines of extreme fear and extreme greed. The market sentiment indicator runs on a scale of 0 to 100. Once the indicator flips to 0, the market is in an extreme fear position, meaning investors are selling off the asset. If it shoots to 100, the crypto market is generally overvalued, and investors are in an extreme greed position. Extreme greed means investors are accumulating the asset as the bitcoin price climbs.
The Fear and Greed Index was recreated by the popular website Alternative.me and integrated into the crypto space. The website is updated daily.
The idea is to gauge the emotional outputs of both emotions in making better market sentiment analysis in the crypto space. The Crypto Fear and Greed Index captures a bull and bear trend daily, weekly, and monthly.
In a bull market, crypto investors always experience the fear of missing out (FOMO) syndrome, which occurs when investors pile up on digital assets with little fundamental research because of a rally in the price of bitcoin. But this rush only lasts for a short period, as there is a flip in investor sentiment with time.
A crypto bubble could be created if the asset continues to rise in value (becoming overvalued). This realization and extreme fear of the asset’s value dropping (causing a price reversal) often force investors to sell off the asset suddenly. The Crypto Fear and Greed Index captures both extremes and tries to present an idea of how the market is reacting based on these emotions.
A fearful market usually presents an ideal buying opportunity for savvy investors; they can buy the dip. On the flip side, savvy traders always sell during extreme greed sessions to buy at a lower price once the asset’s value drops.
How the Fear and Greed Index Is Calculated
The Crypto Fear and Greed Index is formulated using several metrics and parameters. Below, we review the six most important ones to consider.
1. Volatility
Market volatility is the most crucial metric used in the Crypto Fear and Greed Index, generally due to the nature of the crypto market. It commands 25% of the fear index crypto and compares the current price volatility to the averages of the last 30 and 90 days.
If there is strong volatility during these periods, there is the likelihood of a fearful market spurring a bearish trend. On the other hand, stable price growth over these periods could facilitate a better market sentiment for the crypto market.
2. Market Momentum and Trading Volume
Market momentum captures the increase or decrease in prices within a particular period. However, this metric does not only focus on price; it also considers trading volume. The higher the trading volume, the more investors engage, hence a higher greed ratio and vice-versa.
The market momentum is calculated across a 30 to 90-day period, and it takes about 25% of the Crypto Fear and Greed Index.
3. Social Media
Social media has become a major form of influence and tool for making investment decisions in crypto. On platforms like Twitter and Reddit, investors give financial advice. With a high engagement ratio, this metric can point to a potential bull or bear trend on the horizon.
The Crypto Fear and Greed Index tracks hashtags and mentions of Bitcoin and collates them against historical averages.
With a higher engagement ratio to tweets or posts targeted at Bitcoin, the propensity for a bull run is higher.
Social media platforms have become useful tools through which self-professed crypto traders give financial advice and boost FOMO scenarios. For instance, if users intend to pump and dump an asset, they can drive conversations toward this by giving seemingly valuable information. Once investors jump in, the initial investor sells off the asset, leaving the others with a bag of useless coins.
Social media accounts for about 15% of the Crypto Fear and Greed Index.
4. Market Survey
Surveys are no new concept and are generally used to weigh market sentiment around the crypto space. This metric commands about 15% of the Crypto Fear and Greed Index and is usually collected weekly.
It comprises about 2000 to 3000 participants who are questioned about the general market atmosphere and their thoughts. If the survey garners more positive results, this could push the market sentiment toward a bullish trajectory.
5. Bitcoin Dominance
Bitcoin remains the number one virtual asset. Even though the Crypto Fear and Greed Index largely focuses on the bitcoin asset, a high Bitcoin dominance in a market session could point to a fearful market condition. This makes it unstable and unsuitable for investors to enter. This is because Bitcoin is considered a haven for crypto assets. A high dominance could point to a growing fear in the market.
However, in an altcoin-dominated market, investors seek greater profits and are much greedier. This situation would largely facilitate a drop in Bitcoin’s dominance.
Bitcoin dominance represents about 10% of the index.
6. Google Search Trends
Google Trends involves data queries highlighting the questions of search engine users during a particular period. If the queries regarding Bitcoin and cryptocurrencies increase, the chances of the Crypto Fear and Greed Index flipping into extreme greed are higher.
For instance, an increase in Google searches highlighting how to buy bitcoin could spur a rally in the crypto market, while one on how to short bitcoin could facilitate a price drop.
This metric accounts for 10% of the index.
Benefits of Using a Fear and Greed Index
The Crypto Fear and Greed Index can yield great results if coupled with well-balanced research and technical know-how. What are the potential upsides of using this market sentiment indicator?
The first benefit is that it offers savvy traders a snapshot of the general market mood to aid better decision-making. In a landscape where everyone follows the leader, savvy investors can use the Crypto Fear and Greed Index to build a contrarian strategy.
For instance, in an extreme greed situation, investors can sell off their crypto holdings because there could be a sharp drop in the near future. Once the price drops drastically, investors will switch into panic mode and begin selling off their assets. This presents another unique buying opportunity for investors to pile up on the assets for a bargain in a fearful market.
Another benefit of the index is that it forces investors to be more conscientious when making investment decisions. The indicator makes them align with prevailing sentiments and tap into the general market trend in a particular period.
Moreover, the Crypto Fear and Greed Index performs the simplest tasks well, highlighting when an asset is undervalued (at 0 to below 50) and overvalued (50 and above).
Criticisms of the Fear and Greed Index
But this index is not without faults. Several investors have pointed out its weaknesses: one such is that it is not a great indicator for long-term crypto cycles because long-term bear and bull runs usually have periods of fear and greed cycles.
Another disadvantage is that the index does not consider many variables. First, it does not consider the second most valuable crypto asset, Ethereum.
Also, it strikes out an entire scope of altcoins with significant market share. The index also dismisses the impact of stablecoins and decentralized finance (DeFi) on the general mood of the crypto landscape.
Finally, the index does not consider the likely bull run that heralds a Bitcoin halving event.
Is the Fear and Greed Index Reliable?
Can the Crypto Fear and Greed Index be confidently used to track crypto price performance? No.
The index is solely short-term focused. And although it is a powerful tool for gauging market sentiment, investors cannot use it in isolation. Before turning to it for financial advice and making investment decisions, investors should do due diligence and back up their strategies with concrete research.
In addition, investors should consider their unique needs before leveraging this tool. Long-term investors may have to focus on the asset’s fundamentals as against using this indicator.
A Powerful Tool for Informed Trading Decisions
Crypto Fear and Greed Index is a dynamic indicator for marking market sentiment. It relies on human emotions of fear and greed, which makes it a useful tool for swing traders to make gains. However, it is time-limited, making it unviable for long-term market predictions.
Leveraging this tool can help investors record considerable gains. But it must not be solely relied on as a strategy for the conceivable future.
FAQs
What Is Bitcoin Fear and Greed Index?
Bitcoin Fear and Greed Index measures the primary emotions of fear and greed investors experience when trading. It weighs the characteristic emotional output of the market sentiment based on many metrics to determine a short-term bear or bull market.
How Do I Check My Bitcoin Fear and Greed Index?
Investors can easily check the current Bitcoin Fear and Greed Index on the Alternative.me website to learn the current market sentiment.
Who Invented the Fear and Greed Index?
The CNN Business segment developed the Fear and Greed Index to gauge market sentiment related to stocks. It provided a snapshot of how much investors are willing to pay to buy stocks.
