The Crypto Fear and Greed Index assigns a number from 0 to 100, ranging from severe fear to extreme greed, to bitcoin emotion. The indicator is used by many crypto traders to assist them choose the best moment to join and leave the market. Everything from how it works to how you can utilize it to help you trade is covered in this tutorial.
What is the Crypto Fear and Greed Index?
The Crypto Fear and Greed Index, which is based on bitcoin and other significant cryptocurrencies, combines social signals and market patterns to estimate the overall emotion of the crypto market. Because it collects various data sources and merges them into a single figure, it’s called an index.
The following four categories make up the index:
- 0-24: Extreme fear (orange)
- 25-49: Fear (amber/yellow)
- 50-74: Greed (light green)
- 75-100: Extreme greed (green)
How can I Utilize Crypto Fear and Greed Index?
The crypto market, as you’re surely aware, can be quite volatile at times. This is due in part to investors’ emotional reactions to the market. When the market is rising, people may experience FOMO (Fear Of Missing Out) and become greedy. When the market falls, they may grow afraid and sell their coins.
Many traders use the index as a market indicator, a tool that provides them with market data to help them trade more effectively. Many traders have outperformed the market by analyzing the general attitude and emotions that drive the market.
Here’s how the index’s developers advise you utilize it to help you trade:
- Because investors are too concerned, extreme fear might be a buying opportunity.
- Extreme greed may indicate that investors have become overconfident and that the market is headed for a correction.
What Factors go into Calculating the Crypto Fear and Greed Index?
Alternate.me derives the index from a variety of factors, including volatility, market momentum/volume, social media, dominance, and trends. Surveys have been utilized in the past, but they have been put on hold for the time being. The signals are also based on bitcoin, but other significant cryptos may be added to the index in the near future.
Here’s a look at each of the five important signals in more detail:
- A surge in volatility is seen as a symptom of a scared market.
- Market volume/momentum – The current market volume is compared to the present market momentum. When purchasing volumes exceed longer-term momentum, it indicates that the market has become too greedy.
- An exceptionally high interaction rate is utilized to indicate greedy market behavior using a Twitter sentiment analysis technique.
- Dominance – A increase in bitcoin dominance is seen to indicate a scared market migrating to a safer asset, whilst a decline in bitcoin dominance is thought to indicate a greedy market moving to more speculative altcoins.
- Google Trends data is used to determine how many people are looking for information on bitcoin. An rise in search phrases like ‘bitcoin price manipulation’ is seen as a bearish indication, but ‘bitcoin price forecast’ is regarded as more positive.
The Crypto Fear and Greed Index’s Findings
BTC Tools’ historical graphic of the Crypto Fear and Greed Index. It depicts the evolution of bitcoin sentiment through time, especially from June 2019 to October 2020.
As you can see, the index tends to stay in the greed zone for the most part, seldom falling into acute fear for more than a month. It also indicates that during the last two years, bitcoin sentiment has been linked to big crypto events.
The index fell to its lowest point in March 2020, as hysteria about the coronavirus spread and financial and crypto markets, including Ethereum, Litecoin, Terra, and Ripple, dropped down.
It reached its maximum height in February 2021, after rising from AU$10,000 to AU$50,000. That same period also coincided with the ‘DeFi summer’ earning potential. As you can see, it remained there for more than a month until word of China’s mining ban surfaced, and it plummeted.
On a larger scale, this graph highlights two key aspects of the Crypto Fear and Greed Index. To begin with, it might alter really quickly when news breaks or prices fall. Second, it may remain in the greed and excessive greed states for long periods of time.
Overall, the mood toward bitcoin has been largely favorable over the previous two years.