Crypto Fear and Greed Index
The cryptocurrency market is known for several indexes and indicators from on-chain data, giving you more information and insight than you can see on the price charts of historical price movements.
The Crypto fear and greed index is one of those on-chain metrics data analyses.
What is the Crypto fear and Greed Index?
The crypto fear and greed index is an on-chain metric that shows the crypto market sentiment of market participants. That index counts from 0 to 100, with 0 to 49 meaning fear in the market and 50 to 100 meaning greed in the market sentiment.
The crypto fear and greed index scores have meaning and significance; hence, traders use the metric to know the side of the market, sentiments are on and determine what direction of the market they would place trades on.
The score of 0 to 49, which is fear, indicates that the market has an excess supply of assets, meaning that most investors and traders alike are fearful of the market conditions and price action. The score range also means that assets are currently undervalued in the market; hence, it could mean a signal to buy into such assets.
A score between 50 to 100, which is greed on the index, indicates an overvaluation in the price of crypto assets in the market and could be used as a sign to sell and exit your positions in the market.
The crypto fear and greed index is more reliant when it is asset-specific The range of scores can also be sub-divided into extreme fear and extreme greed from the two major ranges of fear and greed depending on the score the index shows.
The crypto fear and greed index has a cycle time of 24 hours, after which the value of the index is recalculated using the parameters which I would discuss later in this article.
The Essence of Measuring Fear and Greed
The crypto fear and greed index is based on the market sentiment around Bitcoin in correlation to the entire crypto market.
Usually, during extreme market activities of volatility, when there is a buying pressure and the price keeps going high, people tend to jump into the market with a lot of greed to buy, in a FOMO ( fear of missing out) these actions increase the crypto fear and greed index score to the greed side.
When the opposite happens, and people see a little red, they begin to sell off their crypto at lower prices than they bought them, triggering excess supply and price devaluation, which pushes the crypto fear and greed index score to the fear side.
The fear and greed index is measured to let people who care to check the index know the outlook of the market sentiment to know when to buy in and avoid selling off their crypto unnecessarily.
The crypto fear and greed index also helps you to be greedy when the market sentiment is fearful and fearful when the market sentiment is greedy; that way, you can optimize the market opportunities as they come.
The crypto fear and greed index is a good indicator that shows traders’ and investors’ overall sentiment in the crypto market. Still, it is not advisable to use just the crypto fear and greed index to enter a trade.
The index helps you not have to go through all the metrics, indicators, and charts to decide if trade would amount to too much work.
Indicator and Index
What is an Indicator?
Indicators are trading tools that traders and investors use to make market analyses easy and faster. These market indicators are of different types and use. The market analysis indicators are of different forms. They could be fundamental analysis indicators, Technical analysis indicators, and sentimental analysis indicators. The technical analysis indicators are among the most common inductors for most traders; some include moving averages, Elliot waves, relative strength index, etc. These technical analysis indicators are mostly used for price action analysis, trading volume, etc.
What is an Index?
An index is an aggregate of statistical data points combined to form a single statistical measure. As a combination of statistical measures, the Index helps traders make trading decisions for the case of the crypto fear and greed index, unlike in the stock market where you can buy indices for the underlying stocks or assets as the case may be.
The working of the Fear and Greed Index
The fear and greed index is calculated with information related to bitcoin collated in the previous day in correlation to the entire crypto market. This is because activities in the bitcoin market are highly correlated to sentiments and price in the entire market. The crypto fear and greed index can be further categorized into:
- 0-24: Extreme fear (orange)
- 25-49: Fear (amber/yellow)
- 50-74: Greed (light green)
- 75-100: Extreme greed (green)
Parameters Used to Determine the Crypto Fear and Greed Index
Alternative. The website that calculates the crypto fear and greed index uses several parameters to develop the crypto fear and greed index. The data points are given the same value as they were in the previous day for proper visualization of the sentimental change progress in the crypto market. These parameters which serve as the Data Source for the index include:
Volatility (25 %)
As shown, 25% of the index is contributed by the volatility of Bitcoin, where the current volatility and max volatility are used. The drop in bitcoin price is compared with the bitcoin average prices of the previous 30 and 90 days, respectively.
The analysis here is that an unusual volatility rise is a fearful market sign.
Market Volume/Momentum (25% of Index)
The present volume of Bitcoins in the market and is ascertained together with the present momentum. This is done by comparing and referencing the volume and momentum of the previous 30 and 90 days, respectively, and these values are out together.
High volumes of buys and continued buying pressure daily suggest positive market sentiments. Hence it suggests the market is acting greedy overly and being bullish too.
Social Media (15% of Index)
This factor considers the number of hashtags about bitcoin and the number of interactions the hashtag is generating. Posts and mentions about bitcoin are also counted and monitored. A large and unusual amount of activity on Twitter especially suggests greed and market sentiment towards the greed index.
Bitcoin Dominance (10% of Index)
This aspect of the index measures the dominance of bitcoin in the market. If bitcoin dominance increases, then it would signal a drop in funds going into altcoins. This means that bitcoin price would probably increase with dominance increase, suggesting a fear sentiment in the crypto market but a dominance.
Google Search engine Trends (10% of Index)
This Parameter contains the data from google search trends data for search queries related to Bitcoin and Bitcoin. The large volume of searches about Bitcoin can give insight into the market sentiment. Such huge search volumes, if positive or negative, would suggest the sentiment of market participants.
Surveys (15% of Index)
This parameter usually takes polls on the website straw poll asking people how they see the market; the number of respondents determines if They would use this parameter in calculating the index or not. Currently, this parameter use has been paused because of the low number of participants, and it has also been paused for a long time now.
Crypto Fear and Greed Index for long term use
The crypto fear and greed index is not suitable for long-term trading decisions or market analysis as market sentiments always change in the current crypto space.
The markets sentiments in any given bull run or bear run change to several cycles of fear and greed; hence investors who wish to hold their crypto assets would not efficiently use such to make much of any decisions.
These switches in cycles of fear and greed index scores within any given bull run or bear run benefit swing traders to make good use of the opportunities presented by the cycle switches.
The crypto fear and greed index gives you a good overview of the major sentiments in the crypto market; this sentiment can help crypto traders and investors alike to make informed decisions on the current market situation.
The crypto fear and greed index alone is not complete enough to make trading decisions, but it’s is a big index that you should not overlook at every point in time.
The crypto fear and greed index gives a solid gathering of market sentiments and a fundamental analysis of social sentiments. Instead of having to do this yourself, the index does this for you.
The information here is financial advice; hence do your due diligence before making any investments.
Originally posted 2021-08-06 10:33:02.