Investing in cryptocurrency is a good way to earn money, but it comes with risks. No one knows what will happen in the world tomorrow or when a particular token will skyrocket. However, experienced investors and analysts are constantly trying to find
patterns, indicators, and factors to predict asset movement. This is how technical analysis was invented.
What is the Fear and Greed Index?
It's a metric or indicator used to measure crypto market movements and sentiments, providing valuable insights to crypto investors who may otherwise be left in the dark. Crypto and stock markets are heavily influenced by the emotions of buyers and sellers, making them vulnerable to sudden market shifts caused by either good or bad news.
Accordingly, the overall emotional tension of buyers and sellers in the crypto market leads to two opposite situations: "fear" and "greed."
- Fear indicates strong investor concern and is often considered a good indicator for buying an asset. Its critical point, when the whole market is in fear, is called Extreme Fear.
- Greed indicates high investor greed at the moment, meaning the market needs correction. Its critical point, Extreme Greed, signals a correction is imminent.
The prevalence of one or the other mood in the market is caused by many factors. For example, the FOMO expression, meaning "fear of missing out," arises during serious altcoin pumps or active Bitcoin growth, and market players begin to make rash deals trying to jump into the last carriage. Most analysts and experienced investors understand this, and the Fear and Greed Index is needed to analyze the current behavior of market players.
The main goal of this index is to assess the market sentiment of crypto traders at any given time and help traders determine their next move. It is worth noting that the Fear and Greed Index does not react strongly to long-term bullish trends, but rather responds to current global news events and short-term changes in the cryptocurrency market.
How is the Fear and Greed Index calculated?
The Fear and Greed Index is an analytical indicator that generates a number from 0 to 100, where:
0-24 indicates an Extreme Fear state in the cryptocurrency market - traders are selling;
25-49 indicates a predominance of Fear in the market;
50-74 indicates a predominance of Greed in the market;
75-100 indicates an Extreme Greed level, meaning that traders in the market are more inclined to buy.
The main objective of this index is to assess the market sentiments of crypto traders at the current moment and aid traders in determining their next move. It should be noted that the Fear and Greed Index does not react strongly to long-term bullish trends but rather responds to current global news events and short-term changes in the cryptocurrency market.
The Fear and Greed Index is calculated according to a simple rule:
When the market is rising, people tend to accumulate more cryptocurrency, which makes them more greedy, leading to much higher price movements. When the crypto market is falling, traders begin to sell their positions, leading to panic selling and reflecting a bearish direction in the index.
Since almost the entire cryptocurrency market follows Bitcoin, the Fear and Greed Index primarily evaluates BTC.
Generally, the fear and greed index in cryptocurrency markets is based on the following indicators:
Volatility (25%). The higher the volatility, the higher the fear. Extreme fluctuations in cryptocurrency prices indicate a troubled market and low investor interest. The index measures volatility and then compares it to the average value over the last month or 90 days.
Volume (25%): Higher buying volumes indicate more greed in the market. The index measures the current volume, using average values for the last 30 or 90 days.
Social media (15%): Social media platforms such as Twitter have a massive influence on crypto markets. One tweet can crash the entire market or set the market mood. The index usually tracks hashtags and mentions, and then compares them to historical average values.
Polls (15%): User and investor opinions also matter and play a significant role in influencing cryptocurrency prices. More positive polls accelerate the index's growth and create a situation of greed in the market.
Dominance (10%): Since the index evaluates based on BTC, the higher its dominance, the more fearful the market is, and the lower the dominance of Bitcoin, the greedier the market becomes.
Google search trends (10%): The fear and greed index also takes into account Google search trends in the final value. The more search interest in cryptocurrency, the more greed can be seen in the market. For example, an increase in BTC search queries on Google coincided with sharp price volatility in cryptocurrency.
When and where to use the Fear and Greed Index?
If we were to give an immediate answer to this question, it would be "always." However, it's not because this is some super-important factor that needs to be considered above all else. No, it should be used in conjunction with other indicators, such as fundamental and technical analysis, and so on. The logic behind this approach is that the more arguments you find "for" and "against" investing in an asset or in the crypto market as a whole, the better.
The Fear and Greed Index is a pretty good analysis tool in and of itself because it is a combination of many indicators that characterize the market sentiment, both in cryptocurrencies and in stocks. However, it is calculated differently in the latter.