What Is the Crypto Fear and Greed Index?

Oftentimes, investors and traders require supporting data to make decisions regarding buying, holding and selling of cryptocurrencies. They need to analyze market fundamentals and key indicators including the Fear and Greed index. However, to make informed decisions investors should use a combination of indicators. The purpose of this article is to assist you to understand the Crypto Fear and Greed Index and how you can use it to make profitable investment decisions.

What Is the Fear and Greed Index?

The Crypto Fear and Greed Index is an indicator which measures the market sentiment for cryptocurrencies. In other words, it gauges the mood of the crypto market. It establishes whether investors or traders have positive or negative perceptions of the crypto market or even a specific cryptocurrency such as bitcoin. The market sentiments influence buying and selling behaviors of traders. It also assists investors to channel their funds towards certain cryptocurrencies.

Background Information

There are two major Fear and Greed Indices on the market at the moment. CNNMoney developed The Fear and Greed Index to measure the emotions of investors pertaining to the performance of a basket of assets or a single security. In this line, the CNNMoney Fear and Greed Index focuses on traditional assets such as stocks and shares. Following the footsteps of CNNMoney, Alternative.me developed a Crypto Fear and Greed index. As the name implies, the Crypto Fear and Greed Index gauges the emotions of the market regarding cryptocurrencies. It began measuring crypto market sentiments on 1 February 2018.
Both indices determine whether the market is greed or fearful. When investors are fearful they sell the cryptocurrencies and when they are greedy they buy them. To determine the level of fear or greed the market has, the indices use a scale ranging from zero (0) to one hundred (100). If the index value is 1, it indicates that the market is in ‘extreme fear’, which can lead to overselling of the cryptocurrency. However, it can also create a buying opportunity since the price is very low and a reversal may be imminent.
On the other hand, if the index value is 100, it shows that the market is ‘extreme greed’ and the investors are willing to sell their crypto holdings. In general terms, when the value of the Crypto Fear and Greed Index is low, it is most likely that the price will rise. And if the Crypto Fear and Greed Index is high, the price will most likely fall. When the value of the index is 50, the market is in a neutral state, there is neither fear nor greed.

Interpreting the Index

1 and 100 are not the only significant values. There are different ranges of values we should understand, if we are to benefit from this index.
To start with, the range 0 to 49 indicates the cryptocurrency is undervalued. This means that the price of the cryptocurrency has fallen below its real or fair value. The range 51 to 100 signifies that the price of a cryptocurrency is overvalued. In other words, the price has risen above the real or fair value. However, within these broader categories there are subcategories:
0–24 = Extreme Fear
25–49 = Fear
50–74 = Greed
75–100 = Extreme Greed
The range, 0 to 24 signifies ‘extreme fear’, as a result many investors sell their cryptocurrencies and exit the market.

The range 25 to 49 signifies fear. During this period an average number of investors sell their assets.
A score of 50 to 74 indicates that there is significant buying of the cryptocurrency, leading to a steady rise in its price.
Lastly, the score of 75 to 100 represents a very hot market with a high possibility of a price bubble.

Factors that Influence the Value of the Index

Alternative.me uses several weighted factors to calculate the Crypto Fear and Greed Index. The term weighted means that each factor has a predetermined contribution value to the index.

Volatility (25%)

The index measures the daily price volatility of a cryptocurrency and compares it against the 30 day and 90 day average volatility. When there is high price volatility in the market, fear develops. On the contrary, low price volatility increases greed.

Market momentum and volume (25%)

When the market is experiencing large selling volumes with negative daily price movements, there is fear in the market. On the other hand, if there are large daily buying volumes with repeated positive price movements in the market, there is greed.

Trends (10%)

The searches related to cryptocurrencies on Google is a potential indicator of the level of fear or greed in the market. Generally, a high search volume of a cryptocurrency indicates greed while a low one signifies fear. However, the type of searches that dominate the internet can also indicate the level of fear or greed.

Social media (15%)

The index tracks the type of mentions or hashtags on social media platforms such as Twitter and compares them to past trends. If there are higher mentions of a cryptocurrency such as bitcoin there is greed while fewer mentions indicate fear.

Surveys (15%)

The site, Alternative.me, conducts weekly polls on cryptocurrencies to study the level of fear or greed in the market. Basically, the results of the survey should clearly show if investors have fear or greed.

Dominance (10%)

A higher crypto dominance than before shows fear while a lower one indicates greed. The two main types of crypto dominance are the bitcoin dominance index and the altcoin dominance index.
Therefore, the Fear and Greed Index emanates from the aggregation of ratings of these factors. In fact, their summation leads to a single figure between 0 and 100.

Index

It helps investors to make sound investment decisions as they can easily identify buying and selling opportunities. For example, extreme fear represents an opportunity to buy the cryptocurrency at low cost. And extreme greed means that the market is heading for a correction. Therefore, traders can use the index to spot trading entry and exit points.
The index is derived from six independent factors which reduce the possibility of other variables influencing it.

Disadvantages of the Fear and Greed Index

It is more of an entry and exit timing tool rather than a market research instrument. This can increase the market volatility.
The investor should not rely solely on the index. Instead, one should use it alongside other indicators.
Also, the index does not predict significant world events such as disasters or wars which can affect prices of cryptocurrencies.

Conclusion

In summary, fear and greed are two emotions which determine the direction of the crypto market. The Fear and Greed Index captures the current market sentiment and depicts it in the form of a value, ranging from 1 to 100. Thus, traders and investors can use the index to make investment decisions based on objective findings. A range of 1 to 49 indicates fear in the market while a scale of 51 to 100 signifies greed. 50 is the only figure which shows that the market is in a neutral state: there is neither fear nor greed. However, it is wise for investors to use more than one indicator when making investment decisions.