What is the Crypto Fear and Greed Index?

The Crypto Fear and Greed Index gives a score of 0-100 for crypto market sentiment. It is based on the CNNMoney Fear and Greed Index, which is used to analyze the stock market.

Fear (score from 0-49) indicates undervaluation and oversupply in the market. Greed (50-100 points) indicates that cryptocurrencies are overvalued and a possible bubble.

Noticing changes in fear and greed levels can be part of your trading strategy when deciding whether to enter or exit the crypto market.

A successful trader or investor is always on the lookout for supporting data when making decisions to invest in the crypto market or sell their savings. Graphs can be examined, basic information can be analyzed. And market sentiment can be taken into account. However, examining all available criteria and indices is not the most efficient use of time. The Crypto Fear and Greed Index brings together sentiment metrics and key metrics to provide insight into market fear and greed. It would not be correct to consider only this indicator. But this indicator can help you understand the general sentiment in the cryptocurrency markets.

What is an index?

Traditionally, an index takes many data points and aggregates them into a single statistical measure. You may have heard of the Dow Jones Industrial Average (DJIA), a famous index that tracks the securities market. The DJIA is a price-weighted combination of 30 major companies listed on various US stock exchanges. Traders and investors can purchase DJIA to open positions in the stocks of these companies at the same time.

The Crypto Fear and Greed Index is also a weighted measure of market data, but the similarities are limited. The Crypto Fear and Greed Index is not something you can buy or any financial instrument. This index is only a market indicator that can support your analysis.

What is a market indicator?

Market indicators make it easy for traders and investors to analyze market data. Indicators are available in all types of market analysis: technical analysis, fundamental analysis and sentiment analysis. If you’ve ever done technical analysis (TA), you’ve probably also had experience with indicators. These indicators can range from simple moving averages to complex chart layouts like Ichimoku Clouds. TA indicators deal with the analysis of prices, trading volume and other statistical trends.

Fundamental analysis indicators, on the other hand, take a different approach. When you research a token or stock, you are essentially trying to determine the underlying value of the project. For example, you can include the number of users and the total market value under one indicator and include them in your research.

In addition, there are market sentiment indicators that measure the feelings and thoughts of investors and traders. The Crypto Fear and Greed Index is just one of many indicators. Other examples include Augmento’s Bearish and Bullish Index and WhaleAlert, which tracks large transfers of whales in crypto markets. Crypto research is to some extent based on the analysis of social media, community and public opinion. Therefore, sentiment analysis can be useful for this asset class.

What exactly is the Crypto Fear and Greed Index?

CNNMoney originally created the Crypto Fear and Greed Index to analyze market sentiment for securities and stocks. Later, Alternative.me adapted its version to the crypto market.

The Crypto Fear and Greed Index analyzes a number of different trends and market indicators to determine whether market participants are feeling greedy or scared. A score of 0 indicates extreme fear, and 100 indicates extreme greed. A 50 means that the market is more or less neutral.

A fearful market could be an indication of undervaluation of cryptocurrencies. Too much fear in the market can cause overselling and panic. Fear does not mean that the market has entered a long-term bear trend. Instead, you can think of this mood as a short- or medium-term reference to overall market sentiment.

On the contrary, there is greed in the market. If investors and traders are greedy, there is a possibility of overvaluation and bubbles. Imagine a situation where the price of Bitcoin is overvalued, raising the markets due to investors’ FOMO (fear of missing out). In other words, increased greed can artificially raise prices, causing excessive demand.

How does the Crypto Fear and Greed Index work?

Alternate.me calculates a new value from 0 to 100 every day. As of July 2021, the Crypto Fear and Greed Index uses only Bitcoin-related information. The reason behind this is that BTC correlates significantly with the overall crypto market when it comes to price and sentiment. There are also plans in the future, possibly to include other major coins such as Ether (ETH) and BNB.

The scale of the index can be divided into the following categories:

  • 0-24: Extreme fear (orange)
  • 25-49: Fear (amber/yellow)
  • 50-74: Greed (light green)
  • 75-100: Extreme greed (green)

The index calculates value by combining five different weighted market factors. Let’s examine these factors:

1. Volatility

(25% of index). Volatility measures the current value of Bitcoin with the last 30 and 90 day averages. The index here uses volatility as an indicator of market uncertainty.

2. Market momentum/volume

(25% of index). Bitcoin’s current trading volume and market momentum are compared to the last 30- and 90-day averages and then aggregated. Consistent high volume purchases indicate a positive or greedy market sentiment.

3. Social media

(15% of index). This factor looks at the number of Bitcoin-related Twitter hashtags, and specifically their engagement rate. Persistent and unusually high interaction is often more about greed than fear.

4. Bitcoin dominance

(10% of index). This entry measures BTC’s dominance in the market. Increasing market dominance indicates new investments in the coin and funds may have been transferred from altcoins to Bitcoin.

5. Google Trends

(10% of index). The index can offer insights into market sentiment by looking at Google Trends data for Bitcoin-related searches. For example, an increase in the search for “Bitcoin Scam” may indicate more fear in the market.

6. Survey results

(15% of index). The use of this entry has been suspended for some time.

Why is the Crypto Fear and Greed Index useful?

The Crypto Fear and Greed Index can be a useful tool for tracking changes in market sentiment. Big swings can present an opportunity to enter or exit before the rest of the market follows the trend. We can see a brief example of this by looking at the index values compared to the total cryptocurrency market cap for the last three months.

Point 1 represents the trough of a significant volatility when the index value fell from 73 (greed) to 27 (fear) on April 26, 2021. Point 2 marks the beginning of another decline from 68 (greed) to 26 (fear) on May 12, 2021. We can see if this overlaps with the crypto market by comparing these changes with the total crypto market cap.

The market value, which was USD 1.78 trillion on April 26, which was also the 1st point, later increased and reached a peak value of USD 2.53 trillion on May 12. Combine that with the data above, and you can see that sentiment has also shifted dramatically from greed to fear, coinciding with a local dip in crypto market cap. As the market becomes more greedy, the total market value rises until it reaches its highest point. At the peak, the sentiment drops sharply once again.

In our example, the index has proven to be helpful in finding a buying opportunity and predicting a sell-off in the market. Using the index, you can check whether your emotional reactions are extreme or in line with the market. But does this index always help in every situation? Most likely not.

Can I use the index for long-term analysis?

The indicator is not very successful in long-term analysis of crypto market cycles. During a bull or bear trend, there are multiple cycles of fear and greed. These changes can be useful to fluctuating traders. But for investors who want to hold their savings, it will be difficult to predict the change from a bull market to a bear market using only the index. To get a long-term perspective, you need to examine the market from other angles.

As always, it is recommended not to use a single indicator or analysis style. Always do your own research (DYOR) before investing and only invest as much as you can afford to lose.

Result

The Crypto Fear and Greed Index is a simple way to combine and summarize many fundamental and market sentiment metrics. Instead of doing this yourself, you can use this indicator to follow social media, Google Trends and other statistics. If you want to include this indicator in your analysis, it would be better to use other criteria and indicators to get a more balanced perspective.

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