What Is Crypto Fear and Greed Index And How To Use It To Your Advantage?
The speculative nature of cryptocurrencies makes crypto markets vulnerable to wild fluctuations. This is why investors try to assess Crypto market sentiment before going ahead with their investments. Crypto Fear and Greed Index gives a general idea about the emotions and sentiments of most investors and how they will impact the crypto market.
Read on to understand the Fear and Greed index in Crypto, how it works, how it is calculated and how to use this index to make informed decisions on crypto investments.
What is Crypto Fear and Greed Index?
The Crypto Fear and Greed Index is equivalent to the Stock Fear and Greed Index. The investment analysis website, Alternative.me started this Crypto Fear and Greed Index in 2018 to measure market sentiments for cryptocurrencies in general. This index tells you if crypto markets are bullish or bearish by collecting data on investors’ emotions from different sources.
The Fear and Greed Index for cryptocurrencies quantifies this data as a score between 0 and 100, with lower scores indicating panic among investors and higher scores denoting greed. The index mainly tracks the performance of Bitcoin in addition to some large altcoins.
This information is collected after assessing various factors like the crypto coin’s volume, volatility, dominance and market sentiments from social media posts. Alternative.me, the issuer of the score, also uses data from Google Trends to understand a cryptocurrency’s popularity.
How does the Fear and Greed Index for Cryptos Work?
A score ranging from 0 to 24 represents ‘extreme fear’. This score refers to situations where investors are selling off their coins as fast as they can. A score of 25-49 denotes a market in ‘fear’, meaning that the investors’ interest is mostly muted. On the bright side, fear and panic in crypto markets can produce a buying opportunity for investors with a high-risk appetite.
A Crypto Fear and Greed Index average of around 50 suggests a neutral market. Scores from 51 to 74 indicate a ‘greed’ score, with many investors buying cryptocurrencies. A score of 75-100 represents ‘extreme greed’, indicating a potential market ‘bubble’ that could ‘burst’ soon. When investors are getting too greedy, it may be the right time to exit investments.
The speculative nature of crypto markets makes investors vulnerable to haphazard buying or selling. People tend to become greedy in rising markets due to the fear of missing out (FOMO).
With a rush of people wanting to capitalise on surging crypto prices, there are higher chances of a sharp correction. In contrast, during a period of ‘extreme panic’, investors may be trying to sell off high-value investments as soon as possible.
The Crypto Fear and Greed Index offers an objective view of the market and prevents investors from making irrational decisions. In simple words, a very low Fear and Greed Index can signal a possible surge in the crypto market. In contrast, a very high score could indicate a sharp correction in the near future.
Also Read: What is Risk Averse And How To Measure Risk Averse?
How Is the Crypto Fear and Greed Index Calculated?
The Crypto Fear and Greed Index is based on six major factors. These factors have different weightage based on how they influence the performance of cryptocurrencies. These factors are:
- Market momentum/volume (25%): The index measures the current trading volume and market momentum of Bitcoin. Furthermore, it compares these metrics against their last 30-day and 90-day averages. Larger selling volumes and negative market movements represent greater market fear and vice versa.
- Volatility (25%): The Fear and Greed Index for cryptocurrencies factors in Bitcoin volatility for 25% of its score. It uses the current volatility and maximum drawdowns of Bitcoin against its corresponding average values for the last 30 days and 90 days. A high momentum and volume of Bitcoin generally indicate considerable market fear.
- Surveys (15%): Alternative.me conducts market-wide surveys on a weekly basis. They usually survey anywhere from 2000 to 3000 people, asking about their views on the crypto market. Positive survey results signify prevailing ‘greed’ in the market which drives the index higher.
- Social media (15%): Social media posts mentioning Bitcoin hold 15% weightage for calculating the index. It utilises a text processing algorithm to track Twitter hashtags on Bitcoin and other cryptocurrency-related posts. An increase in such posts and interactions on them represents a growing interest in cryptocurrencies.
- Dominance (10%): A coin’s dominance refers to its share of the entire crypto market’s market share. Bitcoin shares dominate a considerable amount of the crypto market. Hence, when more and more people shift their investments to it, this denotes an increased fear in the market. In contrast, Bitcoin’s dominance gets reduced when people invest in more risky coins.
- Trends (10%): The Crypto Fear and Greed Index also collects information from Google Trends regarding cryptocurrency searches on the leading search engine. The index tracks the changes in Bitcoin-related searches and the search volumes. While an increase in certain search terms indicates more ‘greed’, a surge in keywords like ‘bitcoin crash’ or ‘bitcoin manipulation’ shows more ‘fear’.
How Can Investors and Traders Use the Crypto Fear and Greed Index?
The Fear and Greed Index for cryptos helps to understand the overall conditions of the markets. It collects information on cryptocurrencies from different sources and converts it to a score that reflects market sentiments.
The following list details some of the benefits of using this index:
- The Fear and Greed Index is a useful tool for all kinds of crypto investors as it reflects the immediate state of crypto markets. Historically, its score has correlated with the price fluctuations of Bitcoin from 2019 to 2022, making it a fairly accurate score.
- This index is useful for both short-term and long-term investors. Those who prefer the buy-and-hold type of investment strategy can also use it to select the right time to buy and sell crypto coins.
- The Crypto Fear and Greed Index is an easy-to-use and reliable technical indicator for day traders. For example, a fearful market experiencing daily declines is favourable to small short positions. In contrast, traders may choose to go long on daily positions in greedy markets.
Despite these benefits, investors should not rely only on the Fear and Greed Index alone. It is a better idea to use fundamental and technical analysis to understand the market behaviour in the near future.
Also Read: List Of 7 Most Popular Types of Cryptocurrencies In India
Final Word
The Crypto Fear and Greed Index represents the market sentiments towards cryptocurrencies in general. It uses a score between 1 to 100 to show whether investors are feeling fearful or greedy about buying cryptocurrencies. You can use this metric to make a more informed decision about buying or selling your crypto investments.
FAQs on Crypto Fear and Greed Index
Ans: If the overall market sentiment is fearful, you may want to buy quality investments for the long term. However, when the market is too greedy, it may be a better option to avoid investing for the time being.
Ans: No, there is no sure way to predict the market sentiments by checking the Fear and Greed index. When the market shows fear, prices could keep going downward, resulting in losses for buyers. In a ‘greedy’ market, it is similarly difficult to know when the prices will stop increasing.
Ans: You can download the Fear and Index widget from Alternative.me to easily check the current index data on your phone’s home screen. However, you will need to install the Scriptable app to use this widget.
Ans: The Crypto Fear and Greed Index is a technical indicator and, therefore, does not consider any fundamental financial factors, making it irrelevant for a macroeconomic outlook. Secondly, the index does not focus on Ethereum, the second largest crypto asset or other sections of the crypto market.
Ans: Bitcoin has a significant correlation with the crypto market as a whole due to its large market share. That is why the Fear and Greed Index primarily focuses on Bitcoin-related information. However, it has plans to cover other large altcoins like Ether and BNB.
Before you go…
- Looking for instant 🚀 personal loans 24*7 anywhere, anytime? Get personal loans up to ₹20 lakh starting at 9.9% p.a. Install the Navi app now!
- Or, maybe you’re looking to buy that house you’ve been eyeing 🏠 and you need a loan of up to ₹5 crore. Install the Navi app now and get instant in-principle approval right away! Interest rates starting at 8.60% p.a.
- How about an affordable health insurance policy 👨⚕️ starting at a monthly premium of just ₹235? Install the Navi app now and get your policy in under 2 minutes.
- Instead, want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research. Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.
Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
