Fear and Greed Index
What does it show and how to use it?
Warren Buffett said: “Be fearful when others are greedy, and greedy when others are fearful”. The well-known quote that tells us to go directly opposite from the mood of the crowd. This is what Fear and Greed index can show us. It helps to understand the mood on the market. The Fear and Greed index analyzes various trends and indicators based on which the mood of market participants is determined. Most often, the index looks like a speedometer with an arrow, the zones are highlighted in different colors.
Why fear and greed? Because these are two eternal diseases of investors and traders. Greed can make us forget about common sense and self-control, and fear encourages us to make quick and rash decisions. Where people and money are involved, there will always be outbreaks of fear or greed. The investor cannot predict their appearance or duration, so this index has been created.
What does the index consist of?
Initially, the Fear and Greed index was developed by CNNMoney to track changes in investor sentiment in the stock market. Later, it began to be calculated and used in the cryptocurrency market. Considering the specifics of the crypto market, the index is made up of the following indicators:
1. 25% is volatility. The current volatility is measured and compared with the averages for the last 30 and 90 days. High volatility may indicate an uncertain mood among investors and pull the index to extreme fear.
2. 25% is the market momentum and volume. The current trading volume and market momentum are measured, compared to the averages for the last 30 and 90 days. Then they are combined or correlated. Large volumes of purchases indicate greed or a bull market.
3. 15% are social networks. The number of mentions in social networks, for example, Twitter, is calculated. Usually, a lot of mentions and a quick reaction to them leads to an increase in greed.
4. 10% is the dominance of bitcoin. We talked about it in detail here. When the dominance of bitcoin grows, this may indicate the fear of investors who are afraid of “burning out” on other coins. Conversely, when the dominance of bitcoin decreases, it indicates the greed of market participants who invest in riskier assets in a desire to earn more and faster.
5. 10% are trends. This indicator includes the analysis of Google Trends data on the number of search queries. The more requests, the greater the greed. However, not only the number, but also the content of requests is considered. So, for example, if requests related to “bitcoin fraud” are popular, then this will be a sign of fear.
The values of all indicators are added together to get the final index value, but as you can see it is only 85%. Why is that? Because initially, the index also considered expert polls. It was the missing 15% but this parameter has not been used for quite some time now.
It is quite simple to read the index. The red zone from 0 to 25 means that investors are extremely scared, then the orange zone from 26 to 49 means fear still dominate and prices may fall even more. The yellow zone near the 50 mark means neutral market sentiment. Then the arrow goes to the area of greed, where the light green zone from 51 to 75 shows the willingness of investors to buy, and the green zone from 76 to 100 is extreme greed.
Why do investors use Fear and Greed index?
In any market with assets, the behavior of players is highly endurable to emotions. Often people act irrationally. They are afraid of red exchange rates or become too greedy because of FOMO. The Fear and Greed Index is a valuable tool for tracking changes in market mood.
It is being said that good investors have to move against the crowd. If the arrow is in the red zone, then investors are scared enough, prices are falling, and this is a great opportunity to buy. And if the arrow is in the zone of extreme greed, then assets are overbought, and it is better to wait for them to fall in price. It is also common view that if the Fear and Greed index showed an extreme level of greed, then this is a signal of an early correction. Conversely, if the index drops to the minimum values, then most likely this is the bottom of the market, and it is expected that the price will go up soon.
But you should understand, there are no universal rules in cryptocurrency trading or investing. That kind of strategies do not always work. Also, remember that the index reflects a general trend, and it cannot be used in relation to one specific project or token.
Where to find the index?
The Fear and Greed index usually s not included in the standard indexes on the exchange. You can find it here:
Alternative. There are also displayed the countdown to the next index update.
Dropstab. There you can apply the index on the graph of a certain token to see how the price correlate with the index in different time periods.
A few examples from the recent past
Just want to recall the two most interesting and recent events when the index reflected the mood of the masses. First is the coronavirus outbreak and the pandemic in 2020. In March 2020, bitcoin collapsed by more than 50%. It fell from $9100 to $4200 in less than a week. This happened for the first time since April 2019. Then the index fell to 9, it was a state of extreme fear. In that time a lot of investors sold even reliable assets, such as Bitcoin in panic.
A year later, in January 2021, bitcoin updated its historical maximum, for the first time reaching the mark of 41 thousand dollars. The Fear and Greed index was in the extreme values of greed, reaching 95.
Conclusion
It is interesting and sometimes useful to know what emotions are driving the market. Baron Rothschild once said that the best time to buy is “when there is blood in the streets”. A lot of investors believe that it is necessary to go against the crowd and enter the market when the other players panic and sell their assets. On the other hand, when most assets are overheated and investors are greedy, you need to refrain from investing. But this is not a rule. You should not make decisions based only on the index of Fear and Greed. It is formed from a variety of factors and shows only the current mood in the market. It is difficult to make a prediction for the future based on it. Moreover, it does not show the usefulness or significance of a certain projects. So, always DYOR!
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