If you’re in the crypto market and follow the news pretty closely, you’ve probably heard of the Bitcoin Fear & Greed Index quite often. The Bitcoin Fear and Greed Index is designed to gauge people’s sentiments about cryptocurrencies at current time. You may have heard that crypto traders use this indicator to build their trading strategies.In crypto trading it is very necessary to know the psychology and emotions of crypto investors i.e. people as the market is very new and considered speculative so determining or understanding human emotions is very useful in crypto trading.
It is very important for you to know whether this index can help you with your crypto investment or how the real structure of this cryptocurrency Fear and Gread index is formed so that you have a clear idea of how to use this indicator in the crypto market. What You Must Know About Crypto Fear & Greed Index Can Really Help Your Crypto Investments. In short, sentiment analysis is very important for crypto trading and Crypto ”Fear & Greed” Index is used as one of the most important tools of sentimental analysis.
What is Crypto Fear and Greed Index?
The Crypto Fear and Greed index generates a single number, between 1 tnd 100, with 1 indicating that the crypto market is in a state of extreme fearfull while on the other end 100 indicates that the market is undergoing an extreme level of greed. This index indicate that extreme fear meaning people are selling amd extreme level of greed meaning people are buying.
0 to 24 = Extreme Fear,
25 to 49 = Fear,
50 to 74 = Greed,
75 to 100 = Extreme Greed.
A general rule of thumb is that when the index value is at 1, this generally correlates to a buying opportunity. This is because the number 1 indicates “extreme fear” in the market, meaning people are afraid of buying at this time, and the price may be dumped as people stay away or sell over fears the crypto is going to lose value. As billionaire American investor Warren Buffett said, “buy when there’s blood in the streets.” . Buffett also said “I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful.”
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On the other hand, if the index is showing 100 it would be seen as “extreme greed” and would generally be interpreted as a sell signal. Think of this as FOMO of people trying to get into a coin at any price, as they want to get into a meteoric rise as investors saw with meme coin like DOGE, SHIB etc in 2021. When prices rise quickly, there’s a high chance prices will sharply reverse and fall just as fast.
When the Fear and Greed Index value is low, this may signal that the crypto price will increase, and when the index value is high, this could indicate the crypto price will soon move lower.
Why Measure crypto Fear and Greed Index?
The crypto market behaviour is very emotional. People tend to get greedy when the market is rising which results in FOMO (Fear of missing out). Also, people often sell their coins in irrational reaction of seeing red candle. With Fear and Greed Index, save you from your own emotional overreactions.
There are two simple Rule You should Follow
Extreme fear can be a sign that investors are too worried and fearfull. That could be a buying opportunity.
When Investors are getting too greedy, that means the market is due for a correction.
Therefore, analyze the current sentiment of the Bitcoin or crypto market into a simple meter from 0 to 100. Zero means “Extreme Fear”, while 100 means “Extreme Greed”. Help you to take voice decision about your crypto investment. Timing is an important factor in any investment specially on cripto because right time investment can give you good returns and if not right time investment has the potential to lose money. And the Crypto Fear & Greed Index can help you a lot in this crypto investment timing.
How is Bitcoin fear and greed index calculated?
The Crypto Fear and Greed Index is designed by relying on 6 reliable sources while preparing it. Each data point is valued the same as the day before in order to visualize a meaningful progress in sentiment change of the crypto market.The Bitcoin fear and greed index can be calculated with the following 6 components: Volatility- 25%, market Volume- 25%, Social Media- 15%, Surveys- 15%, Bitcoin Dominance- 10%, Google Trends- 10%.
The 6 factors based on which the Bitcoin Fear and Greed Index has been developed are Explain below.
1. Volatility (25 %)
2. Market Momentum/Volume (25%)
3. Social Media (15%)
4. Surveys (15%)
5. Bitcoin Dominance (10%)
6. Google Trends (10%)
1. Volatility (25 %)
Measuring the current volatility and max. drawdowns of bitcoin and compare it with the corresponding average values of the last 30 days and 90 days. An unusual rise in volatility is a sign of a fearful market.
2. Market Momentum/Volume (25%)
Measuring the current volume and market momentum (again in comparison with the last 30/90 day average values) and put those two values together. Generally, when see high buying volumes in a positive market on a daily basis, conclude that the market acts overly greedy / too bullish.
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3. Social Media (15%)
While reddit sentiment analysis is still not in the live index (still experimenting some market-related key words in the text processing algorithm), Twitter analysis is running. There, gather and count posts on various hashtags for each coin (publicly, show only those for Bitcoin) and check how fast and how many interactions they receive in certain time frames). A unusual high interaction rate results in a grown public interest in the coin, corresponds to a greedy market behaviour.
4. Surveys (15%)
Together with strawpoll.com , quite a large public polling platform, alternative.me conducting weekly crypto polls and ask people how they see the market. Usually, we’re seeing 2,000 – 3,000 votes on each poll, so we do get a picture of the sentiment of a group of crypto investors. We don’t give those results too much attention, but it was quite useful in the beginning of our studies. You can see some recent results here.
5. Bitcoin Dominance (10%)
The dominance of a coin resembles the market cap share of the whole crypto market. Especially for Bitcoin, A rise in Bitcoin dominance is caused by a fear of (and thus a reduction of) too speculative alt-coin investments, since Bitcoin is becoming more and more the safe haven of crypto. On the other side, when Bitcoin dominance shrinks, people are getting more greedy by investing in more risky alt-coins, dreaming of their chance in next big bull run. Anyhow, analyzing the dominance for a coin other than Bitcoin, you could argue the other way round, since more interest in an alt-coin may conclude a bullish/greedy behaviour for that specific coin.
6. Google Trends (10%)
Gathering Google Trends data for various Bitcoin related search queries and crunch those numbers, especially the change of search volumes as well as recommended other currently popular searches. For example, if you check Google Trends for “Bitcoin”, you can’t get much information from the search volume. But currently, you can see that there is currently a +1,550% rise of the query „bitcoin price manipulation“ in the box of related search queries This is clearly a sign of fear in the market, and use that data for index.
Who created the crypto fear and greed index?
The fear and greed index was developed by CNNMoney to measure two of the primary emotions that influence how much investors are willing to pay for stocks. The fear and greed index is measured on a daily, weekly, monthly, and yearly basis. In traditional markets, the Fear and Greed Index measures investor sentiment based on factors including volatility momentum and demand.
The crypto/Bitcoin ”Fear and Greed” index, developed by alternative.me, seeks to establish if traders are too bullish (represented by “greed”) or bearish (“fear”), and takes several other factors like social media trends and Google search terms into consideration. The index ranges from 0 (“extreme fear”) to 100 (“extreme greed”).
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How to use Crypto Fear & Greed Index?
The Crypto Fear & Greed Index is used to gauge the sentiment of the market. Many investors are emotional and reactionary, and fear and greed sentiment indicators can alert investors to their own emotions and biases that can influence their invest decisions. When combined with fundamentals and other analytical tools, the Index can be a helpful way to assess market sentiment.Extreme fear can be a sign that investors are too worried and fearfull. That could be a buying opportunity. When Investors are getting too greedy, that means the market is due for a correction.
Is Crypto Fear and Greed Index helpfull? Can a Crypto trader rely on Crypto Fear and Greed Index?
Many investors are emotional and reactionary. Behavioral economists shows evidence of the effect of fear and greed on investor decisions.History shows that the fear and greed index has often been a reliable indicator of a turn in equity markets and crypto market as well.
Plenty of market expert and experience trader agree that the fear and greed index is a useful indicator provided that it is not the only tool used to make investment decisions. Investors are advised to keep tabs on fear so that they can leverage buying opportunities when stocks dip and view periods of greed as a potential indicator that stocks might be overvalued and and this is the time of exit the market with good return. Even for those who want to invest in crypto for long-term, this index is very useful. In short, Crypto Fear and Greed Index can be one of the most important and reliable research tools for crypto trading.
Criticisms of the Fear and Greed Index
Many market experts have criticized the Crypto Fear and Greed index, saying it’s not a reliable investment tool. It is seen more as a barometer for market timing rather than an investment research tool. Fear and greed index encourage investors to frequently trade in and out of Bitcoin or crypto adding to market volatility.
Despite some limitations or flaws we can undoubtedly say that this tool is very important and a reliable market sentiment analysis tool for crypto trader or investor.