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- 1 The fear and greed index is a helpful tool for investors to assess the sentiment of the Bitcoin market.
- 2 The index scale values show emotions like fear and greed prevailing in the market.
- 3 A combination of six factors are utilized to make the fear and greed index.
The crypto space is dominated by the market sentiment which in itself is guided by the emotions of the investors like greed and fear. During strong price changes in the market, people either show greed or FOMO (fear of missing out) behavior and make rash investment decisions. The fear and greed index takes this psychological backdrop of the investors into account to evaluate the dominant sentiment of the Bitcoin market.
What is the Fear and Greed Index? How Does it Work?
The fear and greed index, an indicator for the market sentiment analysis, was originally developed by the CNN Business for the stock market. To gauge how emotions influence the stock market, this index uses a scale between 0 (extreme fear) to 100 (greed) while a reading of 50 is deemed neutral.
Alternatively, an esteemed website showing crypto trends, drew inspiration from this and created the fear and greed index for the crypto market. The crypto fear and greed index determines which emotion, fear or greed, is driving the investors and on its basis, assesses the overall sentiment of the market. The major goal of this index is to assist the traders, analyze the Bitcoin or other crypto markets, and make smarter decisions.
The fear and greed index uses a combination of factors, assigns them their respective weights, and then goes on to unify the result into a single figure. The index scale runs from 0 to 100. A lower score (indicated in red) symbolizes fear in the market. Conversely, a high index score (shown in green) implies the market is going bullish and greed is running rampant. The scale is divided further into four categories:
- 0 – 24 = Extreme Fear
- 25 – 49 = Fear
- 50 – 74 = Greed
- 75 – 100 = Extreme Greed
Extreme fear in the crypto market indicates the arrival of a bearish trend, meaning the price of an asset is going down. In this situation, investors are fearful the crypto market is falling, and thus, sell off their coins. However, it is considered as an ideal opportunity for other investors to buy the dip.
As expected, the score of 50 on the scale is deemed neutral. When the index measures ‘extreme greed,’ it shows the traders are becoming greedy and accumulating more crypto. This causes the price of the coin to skyrocket. Many investors utilize this time of the market to make profits by selling the cryptocurrency. However, if the score reaches a 100, the index implies the end of the bullish market and a correction is due.
It is worth noting the fear index era (score between 0-49) denotes undervaluation of a cryptocurrency. On the flip side, the greed index era (50-100 score) characterizes the overvaluation of a cryptocurrency. The index is refreshed every 24 hours.
How is the Fear and Greed Index Measured for Bitcoin?
The factors that contribute to the fear and greed index of the Bitcoin market are provided below:
- Current Volatility
It is well-known that the crypto market is volatile. The extreme fluctuations in the Bitcoin prices (high volatility) signifies an anxious market where investors are fearful. This index calculates the current volatility of Bitcoin, and then, compares it to the average volatility value of the previous 30 and 90 days. 25% of the index’s result is based on the current volatility factor.
- Momentum/Volume of the Market
This parameter of the index takes market momentum (market’s ability to maintain long-term price trends) and current trading volume of Bitcoin into account. In the case where high trading volumes outpaces the market momentum, it indicates multiple investors are participating, and there is an atmosphere of greed in the market.
The fear and greed index measures the momentum/market volume by comparing the current stats with the average of the last 30 and 90 days. This factor makes up around 25% of the index.
- Social Media Posts
The index utilizes the current technology of social media to analyze the sentiment of the Bitcoin market. Social media platforms, like Twitter, is saturated with crypto
enthusiasts who continuously observe the ups and downs of the market.
The index monitors the tweets that contain hashtags mentioning Bitcoin. By analyzing the speed and interaction rates on these hashtags in a specific time frame, the index measures the market mood. Greater interaction rates of people on these hashtags demonstrates the market is entering a greedy territory. 15% of the index’s result is carried by this parameter.
- Surveys
Surveys provide information about the current mood of the crypto market participants. The index calculates this factor by using third-party websites that conduct weekly surveys with a sample size of around 2000-3000 people. Surveys account for 15% of the index’s end result.
- Bitcoin Dominance
Since Bitcoin is the most traded digital currency in the market, the index uses the shift in its dominance to gauge the overall sentiment of the market. If the Bitcoin dominance is high, it could be interpreted as a sign of a fearful market where traders are choosing the safest asset.
On the other hand, if greed is prevalent in the market, it corresponds to the decrease in Bitcoin dominance as investors are turning towards riskier assets, e.g., altcoins. This factor makes up 10% of the index value.
- Google Trends
Analyzing the frequency of the google entries related to Bitcoin is an effective approach to evaluate the atmosphere of the market. If, for instance, the number of queries asking “Bitcoin price manipulation” increases, it signifies a fearful market. Contrastingly, search queries of “Bitcoin price prediction” indicate the market is going bullish. This parameter makes up 25% of the index value.
Rather than predicting long-term market movements, the fear and greed index is used as a daily indicator. The index values can help investors evaluate the sentiment of the Bitcoin market. The index values represent opportunities for the day traders to enter or exit the crypto market before the rest of the market follows suit. However, the investors should not base their decisions on this single indicator tool. Other analyses, such as fundamental and technical analysis should also be considered.
With a background in journalism, Ritika Sharma has worked with many reputed media firms focusing on general news such as politics and crime. She joined The Coin Republic as a reporter for crypto, and found a great passion for cryptocurrency, Web3, NFTs and other digital assets. She spends a lot of time researching and delving deeper into these concepts around the clock, and is a strong advocate for women in STEM.
