In the constant effort to predict the future prices, investors and organizations developed a plethora of interesting indexes and tools, a lot of them have very good application in the market of cryptocurrency.
Among the most popular indicators you can use in the crypto market is the fear and greed index, an indicator that tries to measure the current sentiment on the market.
Crypto fear and greed index was created to measure two of the basic emotions that influence crypto investors’ buy and sell decisions.
Of course, fear and greed index is not capable by itself to help you predict the direction of the market.
But it is strongly recommended to use it combined with other indicators such as the market cap of every crypto or other fundamental factors that affect the crypto prices.
If you wish to learn more about market cap in crypto you are proposed to read the following article: “What is cryptocurrency market cap”.
What is fear and greed index?
Fear and greed index first developed by CNN Money to measure two of the basic sentiments that influence the decisions of investors.
Those two feelings are of course fear and greed.
The index shows a value between 0 to 100.
So, the closer it gets to 0 the more fear the investors feel and on the other hand the closer it gets to 100 the more greedy investors will be.
There is also a neutral space, which are the values that are close to 50.
Fear and greed index suggests that when the value shows excessive greed, assets are valued far above that they should be.
On the contrary, if the index is deep in fear it results in investors trading assets with prices less than their real current value.
What is fear and greed index in crypto?
Alternative.me is the website that has developed the crypto fear and greed index.
Alternative.me gathers data from sources that actually influence those emotions and visualizes every 24 hours their report which looks like this:
Currently the fear and greed index measures exclusively the Bitcoin, but this doesn’t mean that investors don’t use it for altcoins too.
Although it is known that Bitcoin drives the cryptocurrency market, meaning that if Bitcoin rises the whole crypto market is expected to rise.
How to trade using fear and greed index in crypto
Highest fear is a sign that investors are worried about something.
Those worries might come from terrifying global news, a tweet from an influential person and many other factors that no one has the power to control.
Although an experienced investor could see an amazing buying opportunity.
Therefore, when the fear in the crypto market is intense, investors are recommended to think about the buying decision seriously.
Of course the opposite is also true.
Consequently, when the meter is getting closer to 100, investors should be very suspicious about crypto prices.
Additionally, when there is greed on the market is usually a very good chance for investors to exit their positions by selling some or all of their crypto assets.
The above logic is also verified by the American business magnate, Warren Buffett, who said:
“Be fearful when others are greedy. Be greedy when others are fearful”.
Data contribute to crypto fear and greed index
After extended research, Alternative.me has come to the conclusion about the factors that have an actual impact on fear and greed index.
It would be interesting and useful for everyone who is involved or planning to get involved with the crypto market to take a deeper look at how this indicator is calculated.
This will help you not only to understand better how to reap the benefits from fear and greed index but also will help you build an investor’s mindset and maybe inspire you to become a better investor.
- Volatility – Volatility affects 25% of the index. It takes into account the last 90 days. In general, an unexpected rise in volatility enhances the emotion of fear.
- Market Momentum/Volume – The volume of transactions also affects the value of the index by 25%. It also uses the historical data from the last 90 days. High buying volume forces the index towards the greedy emotion.
- Social Media – Social media platforms are an amazing data source since they provide researchers a massive amount of data. So, Alternative.me analysts gather and count posts and hashtags about cryptocurrencies and check how many interactions they receive in a specific time frame. An unusually high interaction rate equals greedy market behavior.
- Dominance – This factor suggests that when Bitcoin dominance is getting bigger, the rest of the altcoins are going to have a fearful market. On the contrary, when the dominance of the Bitcoin has fallen investors are getting greedy on the altcoin market, turning their interest in the hunting of the next altcoin bull run.
- Google Trends – Google trends is another one inventive data source to analyze. Analysts survey using the keyword “Bitcoin” and then see whether the trends are in favor of Bitcoin or not. If the trends are against Bitcoin that will mean that the market is full with fearful sentiments.
Final thoughts
Fear and greed index in the crypto market is a very valuable tool for traders and investors.
However, we should never forget that successful investors do those 2 things:
- Use it in combination with other indicators
- Understand fully the concept and the idea behind it
Thumbnail image source: Ivan Radic
