Crypto investors have long relied on certain indicators to gauge digital asset market sentiment. One indicator you may have come across is the Crypto Fear and Greed Index.
In this guide, we will define the crypto fear and greed index, what data it captures, and how you can incorporate it into your crypto investment strategy.
What Is the Fear and Greed Index in Crypto?
The Crypto Fear and Greed Index is rooted is premised on the logic that excessive fear tends to depress crypto prices, while unchecked greed pushes prices higher. The Crypto Fear and Greed Index was designed by Alternative.me, a software comparison site, to determine the performance of digital assets.
The Crypto Fear and Greed Index operates by estimating the market sentiment. The index generates a number between, 1-100, with the lower end of 1-49 denoting fear and 50-100 representing greed.
A rating of 1 indicates the crypto market is in a state of “extreme fear” with many investors selling their crypto assets. On the other hand, 100 indicates the market is experiencing a high level of greed, with investors buying assets.
When the index indicates a level of extreme fear, this signals a buying opportunity for investors. A fear index of 1 means that increased selling of crypto assets will deflate market prices and investors may be able to acquire digital assets on the cheap.
The greed of the index of 100 denotes a buying frenzy among investors as a result of rising crypto prices. During this period people tend to get greedy, which can lead to FOMO (Fear of missing out) buying. However, this can be interpreted as an opportunity for investors to sell as when crypto prices are rising quicker than they probably should, there is a chance that prices will reverse and decline rapidly in the near future.
How Is the Fear and Greed Index Computed?
The Fear and Greed Index is calculated by gathering data from multiple sources. Each data point is evaluated daily to give an accurate and up-to-date picture of the crypto market’s sentiment.
Several factors influence the ultimate output. Let’s take a look at them.
| Factors | Details | |
| 1. | Volatility | The index measures volatility and maximum drawdowns (a decline in value) of bitcoin by comparing it with the corresponding average values of the last 30/90 days. Higher volatility usually signifies the market is fearful. Volatility comprises 25% of the index. |
| 2. | Market Momentum/Volume | The indicator measures the current volume and market momentum of bitcoin by comparing them with the average 30/90 day values. High buying volumes daily in a rising market will signify that the market is acting bullish. The momentum/volume factor represents 25% of the index value. |
| 3. | Social Media | This tracks the mentions and hashtags of bitcoin on Twitter within a certain timeframe. An unusual higher interaction rate is interpreted as increased interest in the performance of the crypto asset and translates to bullish market sentiment. Social media represents 15% of the index value. |
| 4. | Surveys | The index carries out weekly market-wide surveys that involve a range of 2,000-3,000 participants per survey. This aims to capture the prevailing market sentiment with positive survey results driving the index higher, and signifying market greed is on the rise. Surveys represent 15% of the index |
| 5. | Dominance | The index measures bitcoin’s dominance in the crypto market. The greater bitcoin’s dominance the more fearful the market behaves. The reverse occurs when bitcoin’s dominance declines and market sentiment is positive. Dominance represents 10% of the market value |
| 6. | Trends | The index pulls Google trends for various bitcoin-related search queries and analyses the numbers. The higher the search for cryptocurrencies the greater the greed exhibited by crypto traders and investors. This represents 10% of the index value. |
How Can Traders Use the Fear and Greed Index?
Traders can use the Crypto Fear and Greed Index to gain insight into market sentiment, which can help them to identify potential entry and exit points for the digital assets they are trading.
For example, should the index fall below 20, traders might consider opening long positions whereas, if the indicator is moving close to 100, it may be time to take a profit as the market may be “overheating.”
Like all market indicators, however, the Crypto Fear and Greed Index should not be the only tool traders use. It can be an additional indicator to look at to help make trading decisions but other market factors should be considered too.
Source: https://crypto.news/what-is-the-crypto-fear-and-greed-index/