The Fear and Greed index is not an unfamiliar term for those who regularly keep track of the crypto market. It’s a metric providing a score between 0 and 100 that shows the general sentiment of the crypto and stock market at a particular time. This Index is helpful for investors and traders to decide when to enter or exit the market.
This post will provide all the necessary details about the Fear and Greed Index, such as how the metrics work and the primary indicators it uses to measure sentiment.
What are market indicators?
Indicators are primary factors that quantify market information and gauge the current conditions. The Fear and Greed Index uses multiple metrics to provide insight into the digital sphere. It’s necessary to grasp the structure and functions of the Index.
Indicators can vary from simple technical ones such as moving averages to complicated chart patterns such as Ichimoku clouds. Despite the diversity of indicators used in digital assets analysis, there’s not the best indicator as each one performs a specific function, which gives a deep insight into market movements when combined with a robust analysis strategy.
There are several ways to analyze crypto and stock markets using indicators, categorized into technical, fundamental, and market sentiment analysis.
Technical analysis indicators
Technical analysis is mainly about data-driven analysis of the digital asset markets to understand market movements and determine potential market trends. It considers typical factors such as price and volume data to monitor and predict trends.
A few technical analysis indicators consist of moving averages, moving average convergence divergence (MACD), relative strength index (RSI) and other statistical analyses of the market behaviours. Technical analysis is typically driven by statistical analysis and is usually shown via asset price charts.
Fundamental analysis indicators
Fundamental analysis is primarily about establishing a digital asset’s “real” value. It does this by detecting and verifying all information about an asset apart from market price and volume data.
Fundamental analysis metrics consist of on-chain data like transaction value, transaction count, hash rate, and active addresses, or project metrics like the project team, market capitalization, partnerships, and tokenomics. Fundamental analysis can also include market value to realized value ratio (MVRV), network value to transactions ratio (NVT), and stock-to-flow model.
Market sentiment
Market sentiment is typically crowd psychology used to track the behaviour of market participants. It’s usually gauged by observing crypto investors’ behaviours and interactions with each other and the crypto market.
In addition to technical and fundamental indicators, the Fear and Greed Index is an important indicator that measures broad market sentiment.
All in all, trends and patterns of the digital asset market can be identified and analyzed via different methods. The Fear and Greed Index uses technical, fundamental, and sentiment metrics for the crypto market analysis.
What is the Fear and Greed Index?
One of the widely used indexes by traders and investors is The Alternative.me Crypto Fear and Greed Index (Figure 1).
Fig 1. The Alternative.me Index
This Index is derived from the CNNMoney Fear and Greed Index, created initially to determine the market sentiment in traditional asset markets. Both indexes indicate Warren Buffet’s famous quote: “Be fearful when others are greedy, and greedy when others are fearful”.
The Fear and Greed Index is updated every 24 hours to give the latest information on the current Index and the previous day, the last week and last month’s index values, as shown above).
The Index mainly measures market data related to Bitcoin, as Bitcoin fear or greed has a considerable correlation with the whole crypto market, with significant Bitcoin price movements or trends shown in the market at large.
How is the Fear and Greed Index determined?
The crypto Fear and Greed Index combines and analyses multiple indicators to provide a metric score ranging from 0 to 100 as follows:
- A score of 0-24 indicates extreme fear
- A score of 25-49 represents moderate fear
- A score of 50 reflects a neutral market
- A score of 51-74 signifies moderate greed
- A score of 75-100 shows extreme greed
A low score shows that the market is in a state of extreme fear, where investors are selling owing to a loss of confidence in asset values. A fearful market suggests the undervalued crypto market, as excessive fear in a market can result in panic and overselling. This can imply a buying opportunity.
Note:
Fear within a market doesn’t necessarily signify a long-term bearish trend because the Fear and Greed Index sheds light on short to medium-term market sentiment.
Meanwhile, an extremely high score shows the market’s extreme state of greed where market participants buy and potentially overvalue assets. Greed in a digital asset market can indicate overvaluation and market bubbles. In some cases, investors may boost demand and inflate asset prices.
What is measured by the Fear and Greed Index?
The crypto Fear and Greed Index is determined by multiple market factors with different weights (Figure 2).
Figure 2 – Factors used in calculating the Fear and Greed Index
Volatility
As seen above, the Fear and Greed Index compares Bitcoin’s 30- and 90-day BTC market volatility to volatility and drawdowns (decline in value). Fear is related to a higher level of volatility. Volatility constitutes 25% of the Index.
Market volume
The Index measures BTC market volume and momentum to 30- and 90-day averages. High volume and momentum are negative measures that raise the index value, reflecting too optimistic market mood. Market momentum and volume make up 25% of the Index.
Social media sentiment
The Index compares gathered data to historical averages by calculating the total amount of social media posts (such as Facebook posts or Tweets) related to Bitcoin and average engagement rates. Greed is related to a high level of social media interactions. Social media sentiment accounts for 15% of the crypto Fear and Greed Index.
Survey results
The Fear and Greed Index conducts weekly market-wide polls, with each survey generally involving 2,000 to 3,000 respondents. Greedy market behaviour is related to positive or enthusiastic survey responses. The survey element is sporadically suspended, constituting 15% of the Index when active.
Bitcoin dominance
In general, decreasing Bitcoin dominance means investors’ focus is shifting to altcoins, signalling market greed. Bitcoin dominance compares the market capitalization of Bitcoin to the total capitalization of the crypto market. It contributes 10% to the Fear and Greed Index.
Google trends
The Fear and Greed Index will get data from Google Trends on the frequency and intensity of Bitcoin-related search terms. While increased search interest is commonly connected with greed, a significant number of negatively correlated search phrases might signify the fear in the crypto market. Google Trends account for 10% of the Index.
How can I use the Crypto Fear and Greed Index?
The cryptocurrency market seems rather turbulent at times. This is due, in part, to emotional investors responding to market conditions. As the market is rising, people can feel FOMO (Fear Of Missing Out) and become greedy. As the market falls, they become afraid and sell their coins.
Many investors and traders trade more effectively by learning the market indicator. Others have outperformed the market by analyzing the general attitude and emotions driving the market.
Here’s how the Index can help you trade:
- Because investors are too worried, extreme fear might be a buying opportunity.
- Extreme greed might indicate that investors are overly optimistic and that the market is headed for a correction.
Is the Fear and Greed Index a good trading indicator?
In general, the Fear and Greed Index might be a useful tool for quickly assessing digital asset market movements. Historical Bitcoin price fluctuations are often strongly associated with historical Fear and Greed Index data (see Figure 3). Greater index values are often correlated with higher Bitcoin prices.
Fig 3. The Fear and Greed Index and Bitcoin price chart
As seen above, when the Fear and Greed Index at the bottom is in the red band, it indicates high greed (75-100), which is usually followed by a significant drop in the price of Bitcoin indicated by the red arrows. When the Index is in the green band, it indicates high fear (1-24), which is frequently followed by a price surge, as illustrated above with the green arrows.
How to control my emotions when investing?
We can observe how the general market acts irrationally in the near term by looking at the Crypto Fear and Greed Index. Individual investors often wonder how to manage their emotions and avoid letting greed or fear influence financial decisions.
Many traders utilize the following tactics to regulate their emotions when making decisions:
- Fear when others are greedy, greed when others are fearful.
Many traders use the Index to implement Warren Buffett’s aphorism of being greedy when others are scared and fearful when others are greedy. Keep an eye on the Crypto Fear and Greed Index to determine whether you’re getting caught up in the digital currency market’s emotions.
According to Morgan Stanley, readers should tune out extraneous information and noise, and resist the desire to join the pack.
- Use the dollar cost averaging investment strategy.
Because it helps eliminate emotions from investing, dollar-cost averaging (DCA) is a popular investment approach in the bitcoin sector. Rather than attempting to timing the market with a single large investment, the technique entails making recurring small investments over time.
- Diversify your investment portfolio.
Morgan Stanley analysts advise investors to develop a strategy that diversifies investments across several asset classes and investment vehicles to minimize systemic and asset-specific risk. They view this as a technique to assist you regulate your emotional reaction to market volatility.
Is the Fear and Greed Index right for me?
The Fear and Greed Index’s usefulness to you is determined by a number of factors. The Index is not perfect – both traditional and digital asset markets are volatile and frequently display behaviour that contradicts technical or fundamental analysis.
Very high or low Fear and Greed Index values predict huge market swings in some situations, potentially allowing traders to enter or exit the market before the rest of the market follows the trend. Using the Fear and Greed Index to validate predictions helps a trader to identify patterns via previous analysis.
The Fear and Greed Index is not a reliable predictor of long-term digital asset market mood and only gives information on short-term trends and patterns. Both bull and bear markets experience fear and greed swings. When utilizing the Index, traders had better make more informed decisions if they understood the Bitcoin and crypto market cycles.
Summary
The Fear and Greed Index is a simple tool used to assess the current attitude of the cryptocurrency market quickly. It gives significant insight into whether the market is now scared or greedy by incorporating several elements such as market volume, social media attitude, volatility, survey findings, Bitcoin dominance, and Google Trends.
While the Index can give basic information on the status of the digital asset market, it is best used together with other metrics, technical indicators, or extra research to build a cohesive, balanced picture.
