What is the Crypto Fear and Greed Index?

August 25, 2022

Bitcoin

What is the Crypto Fear and Greed Index?

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Whether you’re new to the crypto trading space or not, the Fear and Greed Index is one of the core aspects of Trading you don’t want to joke with. A lot of successful Traders consult the index alongside other factors before making moves in the market. This article enlightens you on the Crypto Fear and Greed Index and how you can use it to maximize your profits.

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What is the Crypto Fear and Greed Index?

Every action taken by investors in the market is influenced by one of two things: The Fear of Missing Out (FOMO) and Fear, Uncertainty, and Doubt (FUD). In the case of the former, everyone is optimistic the price of a coin will rise; hence each person gets greedy and tries to buy as much of that coin as possible. In the latter, everyone starts selling that coin because its value depreciates. The Crypto Fear and Greed Index is a Numerical Expression of those emotions which control the market. The index is measured on a colored scale calibrated from 1-100.

The scale is divided into 4:

0-24 (Orange) indicates Extreme Fear

25-49 (Amber) indicates Fear

50-74 (Light Green) indicates Greed

75-100 (Green) indicates Extreme Greed

In summary, values below 50 imply fear, and those above signify greed.

How did the Crypto Fear and Greed Index come about?

It all started when CNN Business (Known as CNN Money at the time), a financial news platform, created a Fear and Greed Index that used a few indicators to monitor the behavioral trends in the stock market. Alternative. me, a crypto information platform, took a cue from them and made one for the crypto market.

What are the determinants of the Crypto Fear and Greed Index?

Like the stock market, the Crypto Market contains indicators determining the Fear and Greed Index Value. However, the Crypto Indicators and the Stock indicators are not the same. Crypto indicators do not contribute equally to the total value of the Fear and Greed Index. Currently, the Index is only used for Bitcoin since it has the biggest influence on the market. These indicators are:

Volatility:

Volatility in crypto refers to how high or low the price of a coin gets over a period of time, usually 30 or 90 days. It contributes 25% to the index value. A coin with high volatility carries a huge risk; you either make high profits or record high losses. Because of this, most traders would be unwilling to buy that coin, leading to a below-average index value. On the flip side, a coin with low volatility is a low-risk coin, and this would attract buyers and cause a high index score.

Trends:

Trends refer to the number of times crypto and crypto-related content are searched on Google. The higher the search results, the more the number of people are interested in the coin, which leads to a higher index value. The reverse produces a low index value. Trends bear 10% of the total index. However, there is an exception to this. When people search questions like ‘Is Bitcoin falling?’ and ‘Bitcoin Bear Market,” they only cause panic in the market and discourage investors from buying, thereby lowering the index rating.

Social Media:

Social media makes up 15% of the index. The index has software that analyses the number of engagement posts containing crypto hashtags over a certain timeframe. High engagement levels result in corresponding high Greed levels.

Dominance:

For many years and possibly many more, Bitcoin has dominated the crypto space. The Dominance indicator examines how much of the total cryptocurrency market cap is occupied by Bitcoin. An increase in Bitcoin’s dominance means fear. This is because investors are afraid of buying other coins and decide to play safe by spending on Bitcoin instead since it is the most reliable cryptocurrency. On the other hand, a decrease indicates that traders are getting greedy and buying more altcoins instead. 10% of the index is determined by Dominance.

Market Momentum and Volume:

Market momentum is the market’s ability to sustain a price change over time. The Volume refers to the number of tokens bought or sold over a period of time. The 30 and 90-day averages of both are measured and compared. High buying volumes and positive market momentum indicate greed, while higher selling volumes and negative momentum indicate fear. Both contribute 25% to the Index.

Surveys:

Polls, studies, and other surveys do not currently affect the index. Back then, when they were active, they used to determine 15% of the index.

Where can You find the Crypto Fear and Trade Index?

While many financial platforms give access to the index, you can visit Alternative.me to check it out since they created it in the first place.

What should You do with the Index?

The whole essence of conducting the Index is so you can be one step ahead of the market. It would be best to keep your emotions in check and trade smartly. When the market hits extreme levels on one side, it will likely move in the reverse direction in a short timeframe.

A rule of thumb is to follow Warren Buffet’s advice: Be Fearful when the Market is Greedy and Be Greedy when the Market is fearful.

Conclusion

As accurate as it is, the index doesn’t make predictions about currency prices. Therefore, prices may still go up or down, even while the index indicates extreme greed or fear. Your trading strategy should not solely rely on the Fear and Greed Index.

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