Fear and Greed: What Forces Drive The Crypto Market?

By Superorder.io on ALTCOIN MAGAZINE

Superorder.io
May 25, 2019 · 5 min read

Fear. Greed. These words are familiar for any trader even if he or she doesn’t realize how they affect the process. These emotions change the behavior of numerous users all over the world. Even the best digital currency investors can barely resist fear and greed because of human nature.

However, it’s possible to understand and control these primal forces to optimize crypto trading. Today, we’re gonna talk about the concepts of fear and greed, major cognitive biases related to these feelings, and ways to fight them consciously.

Source: https://behaviorgap.com/

Understanding Emotions

First and foremost, we should agree on the definitions. To understand how your brain works and how it affects your decisions, you should realize the basic concepts behind emotions. Normally, people tend to treat their actions as rational but, actually, humans are extremely irrational creatures. Say, you can master trading strategies, become an expert in signals, and build a great capital. But your brain will forget it all and enable that fear of missing out (FOMO) mode after BTC jumps to $8,000 in a week.

So… Let’s begin with simple things. What is fear and greed, exactly?

Fear

Merriam-Webster defines fear as an emotion caused by anticipation of danger. When it comes to a regular crypto trade, fear prevents people from investing more in the chosen digital assets and, moreover, forces them to sell coins right before the next bullish run. Just a few quick examples:

  • Fear is when you wait for $2,000 per BTC.
  • Fear is when you sell EOS for less than $2 per coin.
  • Fear is when you hold BNB at $4.5 but sells it at $19.3.

Overall, fear leads to pretty high losses because users don’t believe in uptrends or don’t have enough patience to hold assets. Nevertheless, greed is much more destructive.

Greed

Again, according to Merriam-Webster, greed is a desire for something more than needed. Usually, it refers to money or, obviously, digital money. In the crypto world, greed is also often based on fear, precisely, on FOMO. Greedy traders buy BTC before the downtrend or refuse to sell BTC at all.

  • Greed is when you invest in BTC at $20,000.
  • Greed is when you don’t close ETH longs even below $1,000.
  • Greed is when you continue investing in Bitcoin SV.

Compared to fear, greed can be much more harmful. Instead of stopping you from purchasing potentially profitable crypto coins, it forces you to invest money and, put simply, lose them.

Fear & Greed Index

But what about the practical usefulness of this info? Well, there’s a wonderful tool called Crypto Fear & Greed Index that reflects the current attitude of traders. Devs measure the volatility (25% of the final mark), the market volume and momentum (25%), social media moods (15%), results of public surveys (15%), market cap of major coins (10%), and Google Trends data (10%) to get this vision.

The Index is a scale between 0 and 100 where the first number stands for Extreme Fear and the second one reflects Extreme Greed. Using this tool, you can make deals more carefully. In our opinion, numbers 0–15 are strong signs of upcoming bull movements while the range 65–100 predicts huge dumps.

And here’s another crucial question: how effective is this indicator? With the history data, we can analyze some of the most recent price changes and compare them to fear/greed indexes related to the BTC rate (charts are created via the Superorder crypto trading terminal):

  • February 24 = 69 (High Greed) = -$490 in 14 hours.
  • March 5 = 35 (Moderate Fear) = +$200 in 32 hours.
  • March 21 = 62 (Moderate Greed) = -$190 in 2 hours.
  • April 29 = 42 (Moderate Fear) = +$720 in 60 hours.
  • May 14 = 78 (Record High Greed) = -$1450 in 40 hours.

Of course, you don’t have to rely on this tool only but it can be pretty helpful in the moments of uncertainty.

February 24
March 5–6
March 21
April 29 — May 4
May 14–17

Biases Based On Fear And Greed

Okay, now enjoy the related image that reveals all the major stages of any crypto trade. Almost all market players faced these steps once. Most likely, you will face them, too. But we hope that you will be more accurate in the day trading crypto with this pic in mind.

At the end of the day, you should remember that it’s almost impossible to avoid fear and greed affects at all. You will make mistakes, you will lose money, and you will end up with this devastating feeling of helplessness. That’s the nature of crypto trading and crypto markets that are much bigger than one user.

We have only two suggestions:

  1. Design a trading strategy and stick to it regardless of everything.
  2. Admit your mistakes and the importance of luck for everybody.

As a result, you should realize that even the best crypto trading platform or perfect skills can’t prevent problems. But you can do this by accepting your nature and restraining it with pure planning.

Let’s summarize it all with a very famous quote from a very famous (and rich) guy whose name is Warren Buffett. You definitely can grasp the meaning!

“Be fearful when others are greedy and greedy when others are fearful”.

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