Fear and Greed Index: An Indicator of Investor Sentiment
The sentiment of market players has a significant impact on the rate of an asset. By guessing it, you will have an advantage in deciding whether to buy or not to buy this cryptocurrency now. Fortunately, there is an indicator that will help unravel investors’ emotions. We will tell you about it in this article.
What is the fear and greed index?
It is a cryptocurrency index that displays the sentiment of market participants. It ranges from 0 to 100, where 0 means Extreme Fear and 100 stands for Extreme Greed.
Extreme Fear is a sign that investors are worried about the state of affairs in the market or are losing confidence in a particular asset. Accordingly, the price of cryptocurrency falls. This period can also be a good opportunity to buy the asset at a lower price.
Extreme Greed, on the contrary, reflects the great interest of investors and is accompanied by an increase in the asset’s price. In this case, the market needs a correction.
What does the index consist of?
The fear and greed index has five components. Let’s take a closer look at them using an example of Bitcoin, for which this indicator was initially developed:
- price fluctuations: measuring BTC price fluctuations and comparing them with the average values for the last 30 and 90 days;
- market volume and dynamics: measuring the current volume and momentum of the market, comparing them with previous values, and correlating them with each other;
- social networks: counting publications with hashtags mentioning the crypto (mainly on Twitter) and measuring the reaction to them;
- dominance: measuring the BTC share in the total market capitalization;
- trends: analyzing Google Trends data for BTC-related search queries. Both the frequency of queries and their content are taken into account.
Now, let’s trace the change in the BTC fear and greed index over the period from the 5th till the 12th of April 2022:
On the charts, this period was accompanied by a Bitcoin price fall from $45 556 to $40 136.
Thus, the fear and greed index can help recognize the market’s mood and guess the right moment to buy or sell an asset. However, better do not focus on this indicator only as due to BTC price fluctuations, there may be discrepancies between the index and the real state of the market.