Fear and Greed!
Like it or not, these are the two fundamental emotions influencing our day-to-day activities. Especially when it comes to our investment decisions.
Hence, investors need to know the broader market sentiments (fearful or greedy) to decide when to enter or exit or at least understand the market’s direction. It is possible to get these inputs through an intuitive digital tool called the ‘Fear and Greed Index.’ It helps assess the level of these two emotions in the market.
This post will explain what the Fear and Greed index is within the crypto space, the calculation methodology, and how to use it to make favorable investment decisions.
What Is Crypto Fear & Greed Index?
The Crypto Fear and Greed Index uses market trends and social signals to determine the overall sentiment of the crypto market. It’s called an index because it combines multiple data sources and calculates a single figure that lies between 0 and 100.
The number 0 represents the market is in extreme fear, and investors are selling their cryptos. On the other hand, 100 suggests that the market is getting greedy, and investors are buying.
Broadly, the index is divided into the following four categories:
- Extreme fear: 0 to 24
- Fear: 25 to 49
- Greed: 50 to 74
- Extreme greed: 75 to 100
Warren Buffett once suggested that investors should be “fearful when others are greedy, and greedy when others are fearful.”
Ideally, it is advisable to buy when the index is close to 0 as the crypto price keeps falling due to fear in the market. On the contrary, the market experiences extreme greed when the index shows 100 and the asset price rises sharply. In this scenario, selling is advisable as the price tends to fall soon at the same rate. A score of 50 suggests a neutral market.
What Is the Origin of the Fear and Greed Index?
The Fear and Greed Index was initially conceptualized and built by CNN specifically for assessing the stock market on a scale of 0 to 100. It was created to allow investors to gauge stock market movements and whether stocks are reasonably priced or not. It’s also based on the underlying theory that greed pushes the asset price up, and fear drives it down.
The index used for the crypto market was created by ‘Alternative.me‘ in 2018. It uses different measurement indicators, but the idea was inspired by CNN. The crypto index signals if the market is bullish or bearish by collecting inputs on investors’ sentiments from varied data sources.
Currently, the Crypto Fear and Greed Index by Alternative.me is at 23 and indicates extreme fear in the market. This might be a good opportunity for those wanting to enter the crypto investment game. Invest in Bitcoin and other top cryptos using the Crypto Blue chip Coin Set.
The Benefits of the Fear and Greed Index
It is a reliable technical indicator for investors to understand the existing market trends.
Below are the benefits of using this index.
- It is reasonably accurate in representing the immediate state of crypto markets. For example, the index score has positively correlated with the BTC’s price fluctuations between 2019 to 2022. An increase in BTC price reflects a rise in index score and vice versa.
- Based on the index score, investors can smartly buy or sell cryptos.
- Investors with high-risk appetites can use the score to bet against market trends.
- This index is popular among short-term traders but can also be considered for long-term investments. Investors who follow the buy-and-hold investment strategy can identify the right time to buy the assets.
Despite all these benefits, relying solely on the Fear and Greed Index is not advisable. The index should be assessed along with fundamental and technical analysis before making investment decisions.
Why Do We Calculate Fear and Greed?
Though humans would like to believe that they make decisions based on logic and facts, the reality is different. We are emotional beings; unsurprisingly, most choices are driven by emotions. The same is true when it comes to financial decisions.
The crypto market is highly volatile and pushes investors to make irrational decisions. People tend to get fearful when seeing their portfolio in red and become greedy when they experience FOMO (Fear of Missing Out) during a market rise.
Hence, the Crypto Fear and Greed Index can save investors from committing these mistakes. One can analyze the index in the following ways.
- When the index is inching toward 100, it indicates that the market is due for a correction. This is the time to avoid speculative assets at all costs.
- When the index is inching toward 0, it could be a buying opportunity, especially for fundamentally strong assets.
Irrespective of the market conditions, the investors don’t have to worry in the first place if they perform the following actions.
- Purchase fundamentally strong assets
- Avoid speculative investments
- Follow Dollar Cost Averaging (DCA)
- Portfolio Diversification
Factors Influencing the Crypto Fear and Greed Index
The Crypto Fear and Greed Index is calculated based on six key factors: Volatility, Market momentum/volume, Surveys, Social media, Crypto dominance, and Google trends.
Bitcoin covers nearly 40% of the crypto market share, and altcoins typically follow BTCs price direction. Hence, the index is based on Bitcoin only, and it may integrate other critical protocols like Ethereum soon.
How to Calculate Crypto Fear & Greed Index?
The six factors influencing the index have different weightage based on how they affect the performance of Bitcoin.
Below is a quick snapshot of the weights allocated across all the factors.
The index uses BTC’s existing volatility and maximum drawdowns against its corresponding average values for the last 30 and 90 days. Higher volatility indicates that the crypto market is fearful.
2. Market momentum/volume
The index compares Bitcoin’s existing momentum/volume against its 30-day and 90-day moving averages. High momentum and volume increase the final index score indicating greed in the market.
Alternate.me conducts weekly surveys to gauge the crypto market sentiments. Between 2000 to 3000 people participate in each study to express their viewpoints. Positive results would suggest that the market is inching toward greed.
4. Social media
The index assesses all the social media hashtags on Bitcoin and other cryptocurrency-related posts and compares them to previous averages. An increase in such posts indicates a growing interest in the crypto market.
5. Crypto dominance
Whenever there is an increase in Bitcoin’s market cap, it denotes an increased fear in the crypto market. Investors generally consider Bitcoin a safer asset within the crypto space due to its long history. Hence, people don’t invest in risky opportunities in a fearful environment and move towards safer assets (like BTC).
6. Google trends
Lastly, the index examines google trend numbers regarding Bitcoin and cryptocurrency searches on the leading search engines. The type of searches indicates the general mood of the market. For example, keywords like ‘crypto crash’ or ‘bitcoin manipulation’ showcase more fear.
The crypto fear and greed index is one of the quickest ways to identify market sentiment. This index shows if the market is bullish or bearish based on the measurement of investors’ sentiments.
The market is due for a correction when the investors are greedy. On the other hand, it could be a buying opportunity when the index indicates that investors are fearful.
Combined with fundamental and technical analysis, the index can enable investors to make informed decisions, delivering favorable results.
1. What is the fear index for crypto?
The fear index for crypto ranges from 0 to 49. It is further divided into two categories as follows.
- Extreme fear: 0 to 24
- Fear: 25 to 49
Ideally, it is advisable to buy the asset when the index is close to 0 as the crypto price keeps falling due to fear in the market.
2. Is it a short-term or long-term indicator?
Typically, the Fear and Greed Index is used as a short-term indicator. However, it can be considered for long-term investments while making certain decisions. For example, if the market is fearful, you can use this opportunity to buy quality assets at a discounted price. When the market is greedy, it would be better to avoid investing for the time being.
3. How do you read the fear and greed index?
The index combines multiple data sources and calculates a single figure that lies between 0 and 100. The number 0 represents the market is in extreme fear, and investors are selling their cryptos. On the other hand, 100 suggests that the market is greedy and investors are buying. A score of 50 indicates a neutral market.
4. Which is more powerful, fear or greed?
As per several behavioral studies, the fear of loss is far greater than the joy of profit. Hence, based on this logic, we can safely conclude that fear is relatively more powerful than greed.
5. What is extreme fear in crypto?
Extreme fear in crypto is a market sentiment indicating investors are selling their crypto portfolio, driving the price down, and starting a bear run. It is an excellent time to purchase fundamentally strong assets, as those would be available at a discounted price.