Crypto Fear And Greed Index Explained
What Is Crypto Fear And Greed Index
The Crypto Fear and Greed Index is a sentiment indicator used in the cryptocurrency markets to gauge the prevailing sentiment among traders. The index is designed to provide insights into whether the market is driven by fear or greed, allowing traders to make more informed decisions by understanding the emotions and psychology that may be influencing market prices.
The Crypto Fear and Greed Index is updated daily, providing timely sentiment information to traders.
How Is The Crypto Fear And Greed Index Calculated
The Crypto Fear and Greed Index is calculated using a variety of factors:
Volatility – 25%
The current volatility and maximum drawdown of Bitcoin compared with the average values of the last 30 days and 90 days. A spike in volatility signals a fearful market.
Market momentum/volume – 25%
The current volume and market momentum of the overall crypto market compared with the average values of the last 30 days and 90 days. A high value indicates an overly bullish and greedy market.
Social media – 15%
The number of mentions of crypto-related keywords on Twitter and Reddit in a certain period of time. An unusually high number of mentions can signal an increase in interest in the coin which typically corresponds to greedy market behavior.
Surveys – 15%
Alternative.me along with strawpoll.com conduct weekly crypto polls to gauge the public sentiment. Each poll typically gets 2000-3000 votes which provides insights into the sentiments from the sample size of crypto traders.
Dominance – 10%
The dominance of a crypto is calculated by taking its market capitalisation as a share of the market cap of the whole crypto market. Bitcoin is given special attention as it is the largest crypto by market capitalisation which makes it a safe haven in crypto. A rise in Bitcoin dominance typically means a fall in speculative alt-coin trading which can signal a fearful market, and vice versa.
Trends – 10%
Data from Google Trends for various Bitcoin-related search queries such as a change in the search volumes as well as other recommended related keywords that are currently trending are used to determine the prevailing sentiments in the crypto markets. For example, a spike in the search query for “cryptocurrency alternatives” suggests that traders are looking for alternative financial assets to trade instead of crypto. This can signal fear in the crypto markets.
How To Use Crypto Fear And Greed Index
There are two main ways to use the Crypto Fear and Greed Index:
Sentiment Indicator
The Crypto Fear and Greed Index is a type of sentiment indicator that measures the overall sentiment and mood of market participants in the crypto market. It operates on a scale from 0 to 100, where 0 represents extreme fear, 50 is considered neutral, and 100 indicates extreme greed.
The index can be further divided into five categories:
- Extreme fear (0-24)
- Fear (25-49)
- Neutral (50-74)
- Greed (75-99)
- Extreme greed (100)
The index can help traders stay aware of the broader sentiment in the crypto markets – whether the market is driven by euphoria or panic, even if they might not be actively following the news. Other sentiment indicators include the Put Call ratio, the Crypto FOMO indicator, and the CBOE Volatility Index (VIX).
Contrarian Indicator
The Crypto Fear and Greed Index can be used as a contrarian indicator in the crypto markets. A crypto contrarian indicator allows traders to identify opportunities to buy or sell cryptocurrencies that go against the prevailing market sentiment and consensus.
Contrarian traders believe that when the market sentiment is excessively optimistic (greedy) or pessimistic (fearful), a reversal in the opposite direction is likely. The core idea of contrarian trading is to buy when others are selling (during times of fear) and sell when others are buying (during times of greed).
For example, in early November 2021, the Crypto Fear and Greed Index was above 70 and above its historical average value. Using the Fear and Greed Index as a contrarian indicator, traders might look at the excessively high greed value and anticipate a downside reversal.
The high Crypto Fear and Greed Index value in November 2021 happens to correspond to the top in Bitcoin’s price. As of October 2023, close to 2 years later, Bitcoin still has not reached its all-time high price.
Conversely, if the index is showing extreme fear, it may signal a potential buying opportunity, as the crypto markets are likely oversold.
While the Crypto Fear and Greed index provides valuable sentiment insights, it should not be used solely to make trading decisions but rather in conjunction with other tools and analysis methods such as fundamental and technical analysis.
Limitations Of Crypto Fear And Greed Index
The Crypto Fear and Greed Index can be a valuable tool for traders in the crypto markets, but like any tool, it has its limitations.
The first limitation of the index is its overreliance on emotions and sentiments. The Crypto Fear and Greed Index reflects the emotions and sentiments of traders but it does not take into account the fundamental factors that also influence crypto prices.
The index is a relatively recent sentiment indicator which means that it has limited historical data. Traders might face limitations when analysing the long-term trends of the Crypto Fear and Greed Index or assessing its reliability in different market conditions.
Who Created The Crypto Fear And Greed Index
The first Fear and Greed Index was developed by CNN in 2011 as a tool to gauge the prevailing sentiment for the US stock market. The index is derived from seven distinct market indicators: stock price momentum, stock price strength, stock price breadth, put and call options, market volatility, junk bond demand, safe haven demand. The idea has since been adopted for the cryptocurrency markets. The Crypto Fear and Greed Index was developed by Alternative.me which aggregates and analyses data from various sources to measure market sentiment in the crypto space.
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service.
Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.