What Is The Fear And Greed Index?
The purpose of a fear and greed index is to evaluate the two primary emotions influencing investors’ decision-making. The fear and greed index is measured frequently, mostly daily. It shows if the market is bullish or bearish based on the measurement of investors’ sentiments towards the market. It could be a buying opportunity when the index indicates that investors are fearful. On the other hand, the market is due for a correction when the index deducts greed in the market.
Crypto Fear And Greed Index
So how is the Crypto fear and greed index calculated? The crypto fear and greed index generates a number between 1 and 100. The number 1 indicates that the Crypto market is experiencing extreme fear and people are selling their cryptos. On the other end of the spectrum, 100 suggests that the crypto market is getting greedy and that investors are buying. The numbers are calculated by monitoring the buy and sell volumes of the market.
A general rule of thumb states that it is a buying opportunity when the index is close to 1 because investors fear market volatility and sell their crypto assets over the fear of the crypto price falling. People are afraid of investing in new Crypto in this scenario. The famous Warren Buffet once said that we should buy when we smell blood in the market.
On the contrary, the market is experiencing extreme greed when the fear and greed index shows 100, which means investors should sell. Investors sell in this scenario because when prices rise sharply, they tend to fall just as fast.
How To Use Fear And Greed Index As A Tool?
We can divide the crypto fear and greed index into four quadrants to understand how to use the index as a tool. An index score of 0 to 24 indicates the market is experiencing extreme fear. This quadrant could show a buying opportunity as the prices are low, and a price reversal is possible.
A fear and greed index score of 25 to 49 indicates that the crypto market is fearful. It means interest in crypto. Prices are low but not awful.
An index score of 50-74 means greed is slowly taking over the market. This quadrant indicates that crypto prices are rising. A lot of buying is taking place in the market. It also means that it is a bullish market.
The crypto market is very greedy when the index score is between 75 and 100. This quadrant also indicates that a correction will take place in the crypto market.
Bitcoin directly correlates to the fear and greed index. The price of Bitcoin is high when there is greed in the market. The same applies to low Bitcoin prices when the market is experiencing fear.
The fear and greed index can be an investment tool for crypto investors. It is a very reliable indicator for the Crypto market and is handy for buy-and-hold crypto investors.
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What Are The Factors That Influence The Fear And Greed Index?
- surveys: The Fear and Greed Index conducts weekly surveys to gauge the crypto market. About 3000 people participate in each survey. Surveys constitute 15% of the total index value.
- Social media: The index analyzes all the hashtags and mentions for a Crypto and compares them to previous averages. There is an increase in market activity when social media mentions are high. Social media mentions and hashtags represent 15% of the fear and greed index value.
- Volatility: The fear and greed index examines maximum drawdowns and volatility numbers against 30- and 90-day averages. The crypto market is fearful when there is higher volatility. Volatility in the crypto market represents 25% of the index value.
- Volume or momentum: The index compares the current volume and momentum of the crypto market against its 30-day and 90-day averages. High momentum and volume are negative metrics as they increase the final index score. Volume/momentum represents 25% of the total index value.
- The dominance of a Crypto: The market is fearful when bitcoin dominance is high. The market swings on the courageous side when alternative coins gain crypto market share. The dominance factor constitutes 10% of the fear and greed index value.
- Google trends: The index also examines google trend numbers. Greed is high in the market when there is a higher search interest in cryptos. Google trends represent 10% of the total index value.
The Benefits Of The Fear And Greed Index
The crypto fear and greed index chart is a reliable technical indicator of market trends and can be a tool for active investors.
- Crypto investors need not invest without any direction or spend hours on research with the help of the fear and greed index.
- With the help of the index, investors can understand the market sentiments. They can be careful when the index points are at both extremes. Investors can choose to buy or sell cryptos smartly based on the score of the index.
- Brave investors can use the index to invest against market trends. This strategy usually works in a volatile market by taking advantage of trends when other investors are scared to invest.
Read more: Understand Crypto Asset Buying Patterns and Trend Analysis
The fear and greed index provides insights into the state or mood of the crypto market. An index is a tool for active investors as it is a reliable technical indicator of the Crypto market but each investor needs to conduct thorough research to analyze the market as there is no sure way of predicting the crypto market.
Nonetheless, many investors have found the fear and greed index a useful investment tool. It is one of the easiest ways to determine the sentiment of the crypto market. Maybe some would use the fear and greed index to follow what Warren Buffett once said “it can be lucrative to be fearful when others are greedy and greedy when other investors are fearful.”