Greed and Fear are two emotions that determine the outcome of investment decisions. The impact of these emotions can be seen in the price movement in the crypto market. The Crypto Fear and Greed Index helps us determine the dominant emotion in the crypto market at a particular time period.
What Is The Crypto Fear and Greed Index?
The Crypto Fear and Greed Index is an indicator of the dominant emotion in the market between fear and greed. It is actually a speedometer with a scale of 0 to 100, where 0 represents “extreme fear” and 100 represents “extreme greed.”
If the speedometer is close to 0, the market is believed to be undervalued, with fear being the dominant market emotion. Similarly, if the speedometer is close to 100, the market is said to be overvalued, with greed being the dominant emotion. The Fear & Greed Index was originally created by CNN for the stock market. However, Alternative.me created the crypto Fear and Greed Index for the crypto market in 2018. The index created by Alternative.me analyzes the market sentiment for Bitcoin and other cryptocurrencies, aiding investors in informed decision-making.
Alternative.me is a site that helps users find alternatives to popular software, that includes music streaming platforms, utility tools, slide makers, and a lot more. Now they have also added a crypto section, and the Fear and Greed Index is one of the important tools in the section.
How Does The Crypto Fear and Greed Index Work?
The Crypto Fear and Greed Index uses six key indicators to identify the dominant sentiment in the market, along with a score. These indicators are:
- Volatility: The share of volatility in the fear and greed score is 25%. The index compares the current price action of Bitcoin (rise or fall) with the corresponding average values for the past 30 days and 90 days. An unusual rise in volatility indicates fear, whereas a stable rise indicates greed.
- Momentum and Volume: Market momentum and volume also account for 25% of the index. Just like the BTC price action, the current volume and momentum values are compared with the corresponding average values for 30 and 90 days to calculate the score.
- Surveys: If you have been reading insightful articles about the crypto industry, you might have come across some interesting polls and surveys. Alternative.me takes into account these polls for calculating the crypto Fear and Greed Index. Such surveys account for 15% of the index.
- Social Media: Social media platforms, Twitter, Reddit, and Discord, in particular, have a significant impact on the growth of any crypto project. In fact, community strength is one of the metrics VCs consider while investing in a crypto startup. Alternative.me also includes Twitter analysis and Reddit analysis to prepare the index. This includes studying the response to crypto-centric posts and hashtags. The higher the interaction volume, the higher the greed in the market. Social media also accounts for 15% of the index.
- Dominance: 10% of the index’s calculations come from dominance. Suppose you want to find the fear and greed score for Bitcoin, Alternative.me will study the BTC dominance in the crypto market to prepare the score. The increasing dominance of BTC indicates increasing fear in the market as investors move their funds from altcoins to $BTC.
- Trends: Finally, Trends also account for 10% of the index. The index uses platforms like Google Trends to measure the popularity of queries related to cryptocurrencies. Queries like “how to sell you BTC in profit” indicate fear in the market and vice versa.
How Do You Read Crypto Fear and Greed Index?
The crypto market is a fix of beginners, intermediate and seasoned investors. Since our goal is to educate the community, we will stick to seasoned investors. The OG investor Warren Buffet says, “be fearful when others are greedy, and greedy when others are fearful.” That’s exactly how seasoned investors use the crypto Fear and Greed Index.
While the majority of investors exit positions by selling off their holdings as the index nears 0, seasoned investors use the extreme fear in the market as an opportunity to enter trades and build profitable positions. Similarly, when the market is all green with the index nearing 100, seasoned investors know that the market is overvalued and a correction is imminent. That’s when they exit trades by selling off their holdings and waiting for the index to return to greed for another entry. This is the ideal way to use the index.
Conclusion
Crypto is a highly volatile industry that requires analysis and logic minus emotions to make a profit. The Crypto Fear and Greed Index is a great tool that helps you remove emotions from investment decisions. The index has helped millions of investors in the traditional market as well as the crypto market.
However, depending solely on this tool could be another costly mistake on your part. Therefore, consider it one of the many tools required to make it big in the crypto industry. We will discuss some more helpful tools for crypto investment in the coming blogs.