🔎The Importance of Monitoring the Crypto Fear and Greed Index
We will briefly discuss the history and calculation of the fear and greed index in cryptocurrencies, its application for analyzing the market’s emotional state and identifying optimal moments for trades, while also cautioning against relying solely on this indicator for forecasting long-term trends in crypto trading.
đź“ŠHow did the cryptocurrency fear and greed index originate?
The Crypto Fear & Greed Index, a numeric gauge reflecting market sentiment in the cryptocurrency space, operates on a scale from 0 to 100, where 0 signifies “Extreme Fear” and 100 indicates “Extreme Greed.”
This index, modeled after the traditional CNNMoney fear and greed index, serves as a cryptocurrency-optimized tool. Both versions share the common goal of monitoring the dominant emotions influencing trading markets. The underlying assumption is that economic participants frequently make irrational decisions, driven by greed when buying to avoid missing out and by fear when selling during market downturns to prevent potential losses.
🔄How is the index calculated?
According to the current description from the Alternative service, the fear and greed index is calculated based on Bitcoin market data. No other cryptocurrencies affect the index value. The numerical value on the scale is updated daily.
The index is calculated based on five key factors:
-Volatility: Daily measurement, with 30- and 90-day average values considered. Unusually high volatility suggests fear.
-Market Momentum and Trading Volumes: Combines Bitcoin price dynamics, purchase and sale amounts, with averages over 30- and 90-day periods. High volumes in a rising market indicate increased greed.
-Social Media Sentiment: Tracks sentiment on a specified social network using undisclosed hashtags. Increased mentions and rapid user interactions signify greed.
-Bitcoin Dominance: Reflects Bitcoin’s market cap share relative to the overall crypto market. Rising dominance suggests fear as users shift to Bitcoin for reliability, while a decrease indicates a shift towards risk and greed in the altcoin market.
-Google Queries: Analyzes popular Bitcoin-related queries on Google Trends. Increased queries for topics like “Bitcoin price manipulation” indicate fear, while queries like “how to buy Bitcoin” suggest greed. Given the same weight as the Bitcoin dominance indicator.
Survey data from crypto users, once part of the index, is no longer used in current calculations.
🤔What sentiments are shown on the index scale?
The index developers divided the scale into five different “emotional” zones with the following values:
“Extreme Fear” is indicated on a scale ranging from 0 to 25. At this level, the market is expected to be in a state where “weak” hands are selling in panic. Analysts consider this phase to be the most favorable for buying Bitcoin;
“Fear” is indicated on the scale by a value from 26 to 46. At these levels, bearish sentiment is assumed to prevail;
“Neutral” is indicated on a scale of 47 to 54. This index position does not provide any useful data;
“Greed” is indicated on the scale by a value from 55 to 75. These levels indicate that bullish sentiment prevails in the market;
“Extreme greed” is indicated on a scale ranging from 76 to 100. Such index indicators may indicate that the market is dominated by FOMO-mood.
🧠In what situations should one utilize an index?
The logic of the index comes down to the famous phrase of billionaire Warren Buffett: “Buy when everyone is selling, sell when everyone is buying.” The fear and greed scale helps you see the emotional state of the Bitcoin market, and therefore all other cryptocurrencies.
The index is suitable for tracking long-term trends. This instrument is not suitable for active trading. However, the Extreme Fear and Extreme Greed levels can be useful for optimizing strategies such as Dollar-cost averaging (DCA). It involves partial purchase of an asset at extremely low index levels and sale of an asset at opposite values.
Relying solely on an indicator is insufficient for predicting the future. For sustained success, traders are advised to combine multiple indicators with technical analysis skills. Furthermore, traders should exercise their judgment and independently arrive at sensible decisions, as two traders interpreting the same data may reach entirely different conclusions.
Experts suggest that, given its volatility, the Crypto Greed and Fear Index is frequently employed to anticipate short- and medium-term cryptocurrency price movements. However, caution is advised against using it for long-term predictions, as the indicator is susceptible to rapid fluctuations and can be swiftly impacted by new elements.
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