When investors decide whether to buy into or sell out of the cryptocurrency market, they usually look at specific points that often suggest the market’s mood.
These fundamentals range from on-chain data charts and columns from the crypto market, crypto investors, and many others. However, studying these metrics and indexes in the crypto market isn’t effective. Therefore, indicators such as the crypto fear and greed index come in handy.
The crypto fear and greed index combines crypto market sentiment and fundamental metrics. This indicator provides a glimpse of market fear and greed. Also, it reflects the behavior of the crypto market and the interests of sellers and buyers.
However, if you are wondering how these indicators work, our article explains everything, including how they are calculated and some of their benefits and disadvantages.
So, continue reading for more details!
What Is Crypto Fear And Greed Index?
A crypto index is used to measure the greed and fear of investors in the cryptocurrency market. The Crypto Fear and Greed Index is used to analyze investors’ behavior in this market.
So, in case there are important events in the market, either positive or negative, the investors receive news and make decisions immediately without waiting for the best crypto exchange market to open during business hours.
If these investors receive the news at the same time, it can cause market behavior like panic selling. So, when the demand influx of buying and selling 24/7 in this market arises, the crypto fear and greed index analyzes this greed market behavior of the investors. In return, this helps improve the decision-making process so that no one is tied to or influenced by the market mood.
In most cases, the crypto fear and greed index usually ranges from 0 to 100. The 0 represents the extreme fear state among crypto investors that leads to strong selling pressure. On the other hand, 100 has the opposite effect. It indicates extreme greed among the investors, and there is FOMO-induced buying momentum. However, to know more about the crypto fear and greed index, let’s see what it looks like.
How The Crypto Fear And Greed Index Looks Like
In summary, the crypto fear and greed index uses the two main terms (fear and greed) to measure the mood in the crypto market. For instance, investors fear losing their capital. Thus, it may lead to most traders selling out their assets to mitigate unforeseen losses. On the other hand, greed means the investors are accumulating more assets by buying, especially when the market is moving upwards.
So, the crypto fear and greed index uses these market behaviors to evaluate the potential risks and gains, thus predicting the suitable time to buy and sell your bitcoin. The greed index chart comprises a range of numbers from 0 to 100, divided into four categories, as shown in the table below.
|0 – 24||orange||Extreme fear|
|25 – 49||yellow||Fear|
|50 – 74||light green||Greed|
|75 – 100||green||Extreme greed|
So, the crypto fear and greed index creators utilize the above color codes and number range to help traders decide wisely before investing. For instance, the creators of the index suggest that when the index is orange (extreme fear), the investors are too worried; hence, it could be the best time to buy. Similarly, they indicate that the market prices could be low but not awful when the index is yellow, meaning you can buy, but it’s not the best price.
Further, the creators suggest that when the index is light green, greed takes over the market and thus crypto prices. This means the market is bullish as more buying is taking place. Similarly, when the index is green (excessive greed), the investors are too greedy, which is not a good time to buy.
How The Fear And Greed Index Works
The fear and greed index comprises seven market indicators used to measure investors’ behavior. The factors include the following.
- Stock Market Price Momentum
This indicator tracks the S&P 500 versus the 125-day moving average to measure how crypto investor companies are valued in the crypto market.
- Junk Bond Demand
The indicator tracks the spread between investment-grade bond yields and high-yield bonds. This shows investor confidence in the bond.
- Safe-Haven Demand
Safe-haven demand tracks the differences between stock returns and treasury return bonds, indicating investors’ risk appetite in the best cryptocurrencies market.
This indicator usually tracks the Chicago Board Options Exchange (CBOE) VIX, which indicates investor expectations for 30 days of volatility.
- Stock Breadth
It mainly tracks the volume of stock trades versus those that are declining. This indicates bullish and bearish sentiment.
- Put & Call Options
These indicators track the ratio of the call option trade, also known as the “option to purchase stock,” versus the put option trade, the ” option to sell stock,” , either as a bullish or bear indicator.
- Stock Price Strength
The stock price strength tracks the stock numbers hitting 52-week highs and lows. This is done to indicate whether the stock price is becoming overvalued or undervalued.
How Is The Crypto Fear And Greed Index Calculated?
The crypto fear and greed index is calculated using six factors. These factors have an uneven influence on the crypto fear and greed index score, which is based on perceived importance. It’s also good to know that the focus and equal weighting are skewed towards Bitcoin, unlike other cryptocurrencies. These factors include.
This factor accounts for 25% of the index and measures the current Bitcoin value with averages ranging from 30 to 90 days. In this factor, the index uses the current volatility in market uncertainty as a stand-in. High volatility creates more fear, reflecting an increase in where the crypto market is on its final scale.
- Social Media
The social media factor tracks the crypto mentions on different social media sites. When there are more mentions, there is an increase in participation in the crypto market. Further, more mentions are equal to a higher score on the index. Lastly, the social media metric usually represents 15% of the index.
This index measures the dominance of Bitcoin in the overall crypto market, representing 10% of the index value. If Bitcoin’s dominance is higher, it causes maximum greed in the market. So, the lower the dominance, the greedier the crypto market. On the other hand, if the alternative coins gain more market share, the crypto market becomes less fearful.
- Market Momentum & Volume
Market momentum and volume are other metrics that measure the prevailing momentum and the Bitcoin volume in the market against the averages of the past 30 and 90 days. For instance, if there is high volume and momentum, they cause an increase in the final index output. These metrics represent 25% of the value of the index.
- Google Trends
The trend metric represents 10% of the value index and includes the Google trend numbers in the final index output. If there is high cryptocurrency search interest, it causes maximum greediness in the crypto market.
This metric helps conduct large surveys in the market, mainly on a weekly basis, and represents 15% of the value index. Most often, there are 2,000 to 3,000 survey participants in a single survey, and the index becomes higher if there are more survey results. As a result, this causes more greed in the market.
Factors To Consider When Applying The Fear And Greed Index In Investing
Although crypto investors get more interested in Bitcoin’s fear and greed index, there are also high chances of varying sentiments across the assets. Therefore, investors should also consider some factors when applying the indicator in their investments. The factors include the following.
- Asset Interest
Bitcoin controls the movement of other crypto assets because it dominates the cryptocurrency industry. However, sometimes there are cases where other assets move against Bitcoin. So, depending on the crypto market sentiments towards a specific asset, it can continue to rise even when Bitcoin experiences a drop in value and sentiments.
Unluckily, the fear and greed index metrics aren’t available for most assets. In case they are available, investors should consider them along with Bitcoin and other crypto assets that affect the projects. It’s also good to know that relying on fear and greed metrics can lead to bad decision-making.
- Other Prevailing Market Conditions
Market sentiments can be affected by many factors steering the values in different directions. The factors can be outside the fear and greed index considerations. For instance, projects with strong volatility control schemes mitigate the panic sale effects. The projects can also maintain upward trends while there are low sentiments. Therefore, the investors should consider this as well.
- Investment Duration
In most cases, the fear and greed index becomes more relevant in the short term. So, investors who trade on a short-term time frame must consider the investment duration, especially in general market sentiments, before they start trading their assets and making purchases.
Additionally, short-term changes in sentiments and values are irrelevant for those who want to hold on for a long period. So, long-term investors must prioritize projects fundamentally over index suggestions.
Benefits Of Using A Fear And Greed Index
One of the common advantages of the fear and greed index is that it is simple to use. The traders only divide the index readings into quadrants. Traders can easily devise only specific strategies for a single quadrant of the index. In addition, most investors widely follow the crypto fear and greed index in the crypto market. So, the indicator usually has the aspect of a “self-fulfilling” prophecy.
Apart from that, the Bitcoin fear and greed sentiment indicators confirm reversal signals, especially when used with other technical analyses. Moreover, the indicator can give you a little “heads up” when you want to take profits in a profitable trade.
Problems With The Crypto Fear And Greed Index
The greed’s sentimental indicators help interpret the price rallies and the local laws. However, this doesn’t correlate with the price movements. So, the indicator doesn’t guarantee the trader a chance to enter and exist faster.
In addition, it doesn’t show the future because when the score causes extreme fear, it usually reverses and shows the greed first sign. Alternatively, the prices can become deeper and stay low for a long time. For that reason, the crypto fear and greed index is not good for future predictions.
Another disadvantage of the crypto fear and greed index is that it mainly focuses on Bitcoin. Even if there is a rise in other types of large cryptocurrencies, this index will emphasize more on Bitcoin. Additionally, the index calculation often ignores other rapidly expanding sectors, like stablecoins and the DeFi protocols.
Lastly, this index disregards the Bitcoin halving leading to a deflationary impact on prices.
If the question of how to make money with cryptocurrency ever came to your mind, this article will surely help.
Conclusion: How Useful Is The Crypto Fear And Greed Index?
The crypto market behavior is very volatile; hence, no single measure can accurately gauge it. Therefore, as a crypto investor, you should always use holistic market metrics combinations in decision-making. Most experts in the crypto market usually harness this sentiment fluctuation and use it differently, like putting their own emotions under control. This is because they understand that both panic buying and selling can result in losses and missing out on tangible gains.
Additionally, market participants must know that apart from the fear and greed index, they should use other indicators to make conclusions on the market directions. Those factors include investment duration, asset interests, and other prevailing conditions in the market.