The Crypto Greed and Fear Index, Explained
Crypto investors, are you aware of the Crypto Fear and Greed Index? You might have also heard it called the “bitcoin fear and greed index.” Hint: You might have seen it pervading social media or showing up on your favorite stock-related show or YouTube channel.
When you have to juggle information about cryptocurrency, volatility and everything else you need to know about digital assets, why pay attention to one more thing? Well, the crypto greed and fear index captures various market “triggers” from different sources and it can also help you make better investment decisions.
In this piece, we’ll cover the definition of the index itself, the calculations that go into the index from the cryptocurrency market and finally, whether you can trust the index (that’s an important question!)
Let’s dig in so you can make better decisions than average market participants.
What is the Crypto Greed and Fear Index?
The Crypto Fear and Greed Index refers to a metric that gauges the market sentiment of cryptocurrency at a particular point in time.
The index measures between 1 and 100. An index measure of 1, on the lower end of the spectrum, indicates that the crypto market is in a state of extreme fear (in other words, this means people are selling their crypto investments). However, on the very other end of the spectrum, a level of 100 indicates that the market momentum has swung in exactly the opposite direction — everyone sees a buying opportunity and the fear of missing out (FOMO) has caused investors to trend toward extreme greed.
To break the Greed and Fear Index down a bit more, here are some more index levels and market sentiments:
- Under 25: Extreme fear
- 26-49: Fear
- 50: Neutral
- 51-74: Greedy
- 75-100: Extreme greed
You can see this actual index in action at alternative.me. Every day, multiple times per day, alternative.me analyzes emotions from different sources and distills them down into one number: the Greed & Fear Index for Bitcoin and other large cryptocurrencies. The site also plots fear and greed over time, so you can see the difference between when bitcoin dominance first started to appear and how it translated over time.
Why Measure Fear and Greed?
Warren Buffett once said that investors should “be fearful when others are greedy and greedy when others are fearful.” Read: It’s usually a good time to do your own research into the blockchain and see how you can add to your own bitcoin portfolio.
However, it’s easier said than done. Knowing your own level of fear and greed in any particular investment situation can help you make better crypto investment decisions. As the market rises, FOMO also goes up and investors pile on the bandwagon. The opposite happens when red numbers start to rear their ugly head. Your own emotions factor quite a bit into investing, including in the stock market.
How the Crypto Greed and Fear Index is Calculated
The alternative.me website uses six indicators to help determine whether the fear and greed index number will fall. A few indicators include volatility, market momentum/volume, social media and trends. Disclaimer: All of this information comes from the alternative.me website, the best known Crypto Greed and Fear Index in our eyes.
- Volatility: Volatility measures how much the price of an asset has moved up or down over time. You know that if you see an unusual rise in volatility, it’s a sign of a fearful market.
- Market momentum: Momentum indicators can be calculated using formulas to determine the strength of the crypto price movement, and it’s one of the factors used to determine the number for the Crypto Greed and Fear Index.
- Social media: Who can ignore the effects of hashtags and social media? Whenever Elon Musk tweets about Dogecoin, the price usually goes up. There are other social media indicators that can help determine which way the direction of the crypto fear and greed index will go.
- Trends: Google Trends data and search queries can also determine rises in fear and greed, which can affect bitcoin price. When signs of fear show up in Google search terms, it often correlates to what’s happening in the market.
There are also other ways to measure greed and fear, including through surveys and an analysis of dominance, including when Bitcoin dominance shrinks or grows. An analysis of Bitcoin dominance can demonstrate how people feel about alt coins and play into the Fear and Greed Index. Analysis of high buying volumes of a specific coin can affect the Fear and Greed Index as well.
What else can affect the Crypto Fear and Greed Index? Yep, elections, wars (the incident involving Russia and Ukraine), natural disasters, inflation — almost anything can affect it in the short term or the long term, but within that, behavioral patterns start to form.
Can You Trust the Fear and Greed Index?
If you’ve ever heard your dad or grandpa say, “No one can predict future market movements perfectly, not even Warren Buffett,” you know that it’s true that nobody can predict what’s going to happen to the price of bitcoin or other types of cryptocurrencies. However, certain patterns can emerge and help inform your own emotional decisions about what might happen next.
In fact, we’re all emotional to some degree, maybe even more so when it comes to cryptocurrency. And maybe especially in the realm of cryptocurrency, investors rely on instinct more than anything — remember, people are the ones who give cryptocurrency its real value.
Note: You can also use the Fear and Greed Index when you’re making your initial forays into the stock market as well.
Should You Use ONLY the Fear and Greed Index?
All of this begs the question: Should you rely on just the Fear and Greed Index with stocks and/or cryptocurrency (or, for that matter, another type of investor sentiment measure?) as the only factors in making your investment decisions? Nope — you’ve gotta understand your fundamentals as well, especially when you’re investing in stocks.
When you invest in cryptocurrency, you also want to consider the market capitalization of the coin, the total of coins to be mined and the total supply, the white paper (which examines every single last detail of the coin) and the coin’s use cases, or the types of problems it solves.
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