If you’re a cryptocurrency enthusiast, you’ve probably seen the Crypto Fear and Greed Index bouncing around on social networking sites or in the news. The Crypto Fear and Greed Index is a tool that measures cryptocurrency market sentiment at any given time.
It’s critical to comprehend the index’s structure, what it captures, and what it informs you about the market before deciding whether it’s an indicator worth paying attention to when making investment decisions.
What is the Crypto Fear and Greed Index, and how does it work?
The index generates a single value between 1 and 100, with 1 suggesting that the crypto market is experiencing severe fear (i.e., people are selling) and 100 showing that the market is experiencing excessive greed (i.e., people are buying) (meaning people are buying).
A typical rule of thumb is that when the index value reaches 1, it indicates a good time to buy. This is because the number 1 in the market symbolizes “extreme dread,” implying that people are hesitant to buy at this time, and the price may fall as a result of individuals staying away or selling out of concern that the crypto will lose value. “Buy when there’s blood in the streets,” as Warren Buffett, the billionaire American finance expert, once quipped.
On the other hand, if the index is at 100, it is considered “extreme greed” and is usually read as a sell signal. Consider it a stampede of people seeking to get into a hot market at any cost in the hopes of profiting from spectacular growth, such as what investors experienced with meme stocks in 2021. When prices increase swiftly, there’s a good probability they’ll reverse and plummet just as quickly.
To put it another way, if the Fear and Greed Index value is low, it might imply that the crypto price will rise soon, and if the index value is high, it could indicate that the crypto price will fall soon.
The Fear and Greed Index is calculated in the following way.
So, how do they come up with the final figure?
The final result is influenced by a number of things.
Volatility: The index compares volatility and maximum drawdowns (a drawdown is a value fall) to the 30-day and 90-day average volatility and drawdown numbers. Higher volatility is viewed as frightening, resulting in a higher-end output. Volatility accounts for 25% of the index’s value.
Momentum/Volatility: The present momentum and volume of the bitcoin market are measured by the index. Against the 30-day and 90-day averages once more. High volume and momentum are considered negative indicators that raise the final index output. Momentum/volume accounts for 25% of the index’s value.
Social Media: The index tracks bitcoin mentions and hashtags on social media and compares them to historical averages. Increased market participation is perceived as more mentions and hashtags, resulting in an increase in the final index output. Social media accounts for 15% of the index’s total value.
Surveys: On a weekly basis, the index performs massive, market-wide polls. Each survey typically has 2,000-3,000 participants. The index rises as more positive survey results emerge, indicating that market greed is in play. Surveys account for 15% of the index’s total value.
Dominance: The index evaluates bitcoin’s overall market dominance. According to the indicator, the stronger the bitcoin dominance, the more terrified the market is. As alternative currencies gain traction, the market is behaving bravely rather than scared. The market becomes more greedy as bitcoin’s dominance decreases. Dominance accounts for 10% of the index’s value.
Trends: Google trend numbers are included in the final value of the index. The greater the demand for cryptocurrencies, the greater the level of greed displayed in the market. Trends account for 10% of the index’s total value.
