Sentiment is one of the important factors affecting cryptocurrency prices. Among them, Fear & Greed are the most powerful emotions that can influence investor behavior.
What is the Fear & Greed Index?
Fear & Greed Index is very popular in market used in various financial markets. In this article, I will focus on the Fear and Greed indicator used in the crypto market.
The Fear and Greed Index ranges from 0 to 100. This index is measured based on the following 5 factors:
- Market Momentum / Volume
- Social media
- Bitcoin Dominance
- Google Trends – data from Google
Where 0 represents the extreme fear of investors that can cause strong selling pressure. A value of 100 has the opposite meaning: investors are being extremely greedy. There may be some buying impulse caused by FOMO.
Meaning of Fear and Greed Index
Investors often tend to be greedy when the market is bullish which leads to FOMO (Fear of Missing Out). And they often sell their assets when they see the market drop – fear psychology. There are two simple assumptions:
- Extreme fear can be a sign that investors are getting too nervous. That could be a buying opportunity.
- When investors get too greedy, it means the market is about to correct.
The Fear and Greed Index analyzes the current sentiment of the Bitcoin market and collects the numbers into a simple unit of measure ranging from 0 to 100. Zero indicates the state of “Extreme Fear” and 100 is the Extreme greed”.
How the Fear & Greed Index works
Fear & Greed Index has a new value from 0 to 100.
As of July 2021, the Fear and Greed Index for Cryptocurrencies only uses Bitcoin-related information and indicators. In the future, this indicator may also include other top coins such as Ether (ETH) or BNB .
The index below is divided into 4 main color gamuts, with each color representing different emotions:
- 0 – 24: Extreme fear (orange)
- 25 – 49: Fear (amber/gold)
- 50 – 74: Greed (light blue)
- 75 – 100: Extreme greed (green)
To create the Fear & Greed Index, Alternative.me used the following 5 parameters:
- Measure current volatility and Bitcoin maximum withdrawal value and compare it to the respective averages of the last 30 days and 90 days.
- Thereby, an unusual increase in volatility is a sign of a scared market.
Market Momentum / Volume (25%)
- Measure current volume and market momentum (against the last 30/90 day average) and compare the two.
- If buying volume on a market is high => the market is in extreme greed / prices are moving high.
Social Media (15%)
- Gather and count reddit posts and test how fast and how many interactions they get in certain timeframes.
- The unusually high engagement rate has led to a growing interest in the coin. This corresponds to greedy market behavior.
Bitcoin Dominance (10%)
- Bitcoin Dominance – Bitcoin dominance (% of Bitcoin’s capitalization to total market capitalization) is also one of the important factors forming this index.
- When the BTC Dom increases, it shows that the capital flow is in Bitcoin. Conversely, when the BTC Dom falls, the capital flow is now in Altcoins.
Google Trends – data from Google (10%)
- Google Trend data to query various Bitcoin related searches and process those numbers.
- The change of search volume as well as popular searches is also one of the important factors expressing public sentiment.
Survey (15%) – currently on hiatus
Should Fear & Greed Index be used in long-term analysis?
This index is updated every day at a certain time, so it will be short-term. Often used by traders to look at the sentiment of the crowd during the day.
Therefore, this indicator is not suitable for long-term analysis of market cycles. This can be understood simply that you cannot analyze the BTC chart to find an entry point at the 15 minute 1 hour frame but holding for 1 year is not reasonable.
This indicator is very useful for traders in the short term, applying to rotate their capital. However, for investors looking to hold the asset for the long term, it can be difficult to predict a change from a bull market to a bear market from the index alone. It is necessary to analyze other market aspects to get a long-term perspective.
As every article I share, to have a good trading strategy, it is necessary to combine many different factors. Above all, you need to spend a fair amount of time researching, learning to map out a suitable strategy before investing any money and only invest what you can afford be lost.
Fear and Greed Index FAQ
How do fear and greed affect investor decisions?
Many investors follow emotions without any method or methodical investment strategy. That is why fear and greed are the two emotions that mainly affect investors.
According to some researchers, greed and fear can cause us to dismiss common sense and self-control and incite change. Then, fear and greed can be powerful motivators for investors to make buying and selling decisions.
How do you overcome fear and greed in trading?
The best way to overcome Fear & Greed in trading is to develop a trading plan and try to be disciplined.
A good trading plan can prevent acting on impulses. Trading decisions may not follow the original plan including stuffing orders, not stopping losses or trying to add more money to avoid burning the account, …
To summarize, the measurement of the Fear & Greed of investors in the market can be done using the Fear and Greed Index. However, you should not only use this indicator for buying and selling trades. Because in order to have a suitable strategy, it is necessary to combine a lot of different factors.
So I shared about what the Fear & Greed Index is as well as how to read the greed and fear index. What do you think about the accuracy of this indicator?