What is the Crypto Fear and Greed Index?
The market sentiment analyser could be a useful tool in your technical analysis arsenal
- Why and how to use the crypto fear and greed index
- What metrics does the crypto fear and greed index use?
- Was 2021 a year of FUD or FOMO?
- In summary
The crypto fear and greed index, run by the Hamburg-based software company Alternative.me, is a free-to-use tool for determining market sentiment in the bitcoin and larger-cap cryptocurrency markets.
What is the crypto fear and greed index? The index, updated every 24 hours, uses a range of metrics covering volatility, volume, social media comments, dominance and trends to keep running tabs on market behaviour. Are traders fretting over FUD, falling for FOMO or feeling on the fence? The crypto fear and greed index is there to let you know.
Why and how to use the crypto fear and greed index
The crypto fear and greed index is useful to get a general idea of current market sentiment. Traders can exploit extreme fear to buy a dip, or extreme greed to either sell or enter a short position. But it is not a stand-alone tool. Any trader worth their salt should have a host ofother tools and analytics at their disposal as well.
The Fear and Greed Index, shown below, oscillates between 0 (extreme fear) and 100 (extreme greed) depending on the five data points mentioned above. Theoretically, extreme fear could represent a buying opportunity because of sellers undervaluing the crypto market. Similarly, extreme greed could suggest inflated market valuations, leading to a correction.
Market sentiment indicators are a useful tool, since sentiment does not always reflect the actual health of an asset. Many external factors can cause market fear, including inflation warnings, Covid-19 spikes and international conflict. Savvy traders can “buy the dip”, in cryptocurrency market parlance, when markets move in such ways.
What metrics does the crypto fear and greed index use?
So how does the crypto fear and greed index work? The index follows five data sources, weighted differently:
Volatility (25%): A rise in price volatility (bitcoin is specifically tracked) is a sign of a fearful market
Market Momentum/Volume (25%): High buying volumes are a sign of a greedy market
Social Media (15%): The indicator follows certain Twitter hashtags and compiles interaction rates over certain timeframes
Surveys (15%): Through sister site strawpoll.com. This metric is currently inactive
Dominance (10%): A rise in bitcoin’s share of market capitalisation indicates fear of the wider altcoin market, while a reduction in market capitalisation shows greed as traders flock to riskier assets
Trends (10%): This indicator follows Google queries such as “bitcoin price manipulation” to further elicit market sentiment
Was 2021 a year of FUD or FOMO?
For the uninitiated, FUD is an acronym for fear, uncertainty and doubt. It is often used in a derogatory context for bearish traders causing undervaluations in the crypto market. On the other hand, FOMO, or fear of missing out, happens when investors pile into the market, hoping to get a piece of the profit pie, thus ramping up greed and possible overvaluations of cryptocurrencies.
As we can see in the above graph, 2021 saw some wild mood swings between extreme greed and extreme fear. This is unsurprising, given the rollercoaster year it was. Extreme fear was most evident in June and July, whereas November saw sentiment heading up to extreme greed, just before the crypto winter brought market valuations crashing down.
Can the crypto fear and greed index predict what is in store for the crypto market in the future? The answer is no. While the tool works as a quick reference for determining market sentiment right now, a serious trader should use a robust set of technical indicators and fundamental analyses in their investment strategy.
The crypto fear and greed index ranges from 0 (extreme fear) to 100 (extreme greed). A 0 reading suggests that the market is possibly undervalued while a 100 reading suggests the opposite. Of course, this tool should only be one of many you use in your technical analysis.
Theoretically speaking, extreme fear in the market could mean that digital currencies are undervalued and a dip could be bought into. Alternatively, extreme greed could be an indication to either sell or enter a short position. This tool should never be used as the sole factor in your trading strategy. Currency.com always recommends doing extensive due diligence on any asset.
The crypto fear and greed index is calculated through six metrics, being volatility, market momentum/volume, social media, surveys (currently inactive), dominance and trends.