When deciding whether to buy or sell to exit the crypto market, a good trader or investor will always look for supporting data. There are charts to look at, fundamental indicators to analyze and market sentiment to exploit. However, researching every metric and index is not an efficient way. The Crypto Fear and Greed Index is the combination of sentiment analysis and fundamental indicators that allows you to quickly grasp the market’s fear and greed. While you shouldn’t rely on these indicators alone, it can give you an overall view of the crypto market.
What is a market indicator?
Currently, there will be 3 basic types of market indicators including Technical analysis, Fundamental analysis and Psychological analysis.
Technical analysis (TA): also known as charting research, is a type of analysis that allows traders to predict future market behavior based on previous price movements and volume. The TA method is widely applied to stocks and other assets in the traditional financial markets, but it is also an integral part of the crypto market.
Fundamental analysis: involving analysis of the available information of financial assets. For example, you can look at its use cases, the number of users, or the development team of the project.
Psychological analysis: a form of research that uses information to predict price movements. By monitoring the market changes and overall attitudes of traders, you can understand the level of hype or fear surrounding a particular cryptocurrency. In addition, market sentiment refers to traders’ thoughts and emotions on an asset. The emotions do not always reflect the fundamentals of the property or project, but can significantly influence the price.
Today, Jade Forest Capital will dive into crypto market sentiment to give you the broadest overview to determine what stage the market is in by using the Greed and Fear indicator.
What exactly is the Fear and Greed Index?
The Fear and Greed Index was originally created by CNNMoney to measure market sentiments towards stocks in general and corporate stocks in particular. Then Alternative.me adapted CNN’s approach and developed a different version for the crypto market.
The Fear and Greed Index for cryptocurrency analyzes a basket of different market trends and indicators to determine whether traders are feeling greedy or fearful. A score of 0 indicates extreme fear, while 100 indicates extreme greed. A score of 50 indicates that the market is somewhat neutral.
A market full of fear would mean that cryptocurrencies are undervalued, which can lead to overselling and excessive panic. Fear does not necessarily mean that the market has entered a long-term downtrend. Instead, you can take it as a short- or medium-term reference to overall market sentiment.
Greed, however, is the opposite situation. If investors and traders are greedy, they are likely to overvalue and have an asset bubble. Imagine a situation where FOMO (fear of missing out) causes investors to pump into the market, they will overvalue Bitcoin. In other words, high levels of greed can surge demand and artificially inflate prices.
How does the Fear and Greed Index for crypto work?
Every day, Alternate.me calculates a new value from 0 to 100. As of July 2021, the Fear and Greed Index for crypto uses only Bitcoin-related information. The reason behind this decision is the significant correlation between BTC and the entire crypto market when it comes to price and sentiment. In the future, this indicator may also include other major coins such as Ether (ETH) and BNB.
Fear and Greed Index
You can divide the scale of the index into the following categories:
0-24: Extreme fear (orange)
25-49: Fear (amber/gold)
50-74: Greed (light blue)
75-100: Extreme greed (green)
The indicator calculates value by combining five different weighted market factors. These five factors include:
1. Volatility (25% of the index): Volatility measures Bitcoin’s current value with an average of 30 and 90 days ago. Here, the index uses volatility as a benchmark for uncertainty in the market.
2. Momentum/market volume (25% of the index): Bitcoin’s current trading volume and market momentum are compared with the previous 30 and 90 day averages, and then combined. Continuous high volume buying indicates either positive or greedy market sentiment.
3. Social media (15% of the index): This factor looks at the number of hashtags on Twitter related to Bitcoin and specifically its engagement rate. Oftentimes, an unusually high and persistent number of interactions has more to do with market greed than fear.
4. Bitcoin Dominance (10% of the index): This input measures BTC dominance over the market. BTC Dominance represents the market’s demand, confidence, and capital flow trends for Bitcoin. Increasing BTC Dominance indicates new investment in this coin and the possibility of reallocating funds from altcoins.
5. Google Trends (10% of the index): By looking at Google Trends data for Bitcoin-related search queries, the index can provide insights into market sentiment. For example, an increase in searches for “Bitcoin scam” would indicate more fear in the market.
6. Survey results (15% of the index): This information will now exist for some time, when quality surveys are included in the value calculation.
Why is the Fear and Greed Index Useful?
The Crypto Fear and Greed Index can be a valuable tool for examining changes in market sentiment. Large swings can provide an opportunity to get in or out before the rest of the market goes with the trend. We can take an example of this by examining the total crypto market capitalization over the past three months against index figures.
Should the index be used in long-term analysis?
The indicator doesn’t work as well on long-term analysis of crypto market cycles. Within a bull or bear run, there are multiple cycles of fear and greed. These switches are useful for swing traders to take advantage of. However, for investors who want to hold, it will be difficult to predict the change from a bull to a bear market just from the index. You will need to analyze other market aspects to get a long-term perspective.
Jade Forest Capital has brought you all the information about the Fear and Greed Index in the Crypto market.
Note: The Crypto Fear and Greed Index is a simple way to gather and summarize a whole range of fundamental and market sentiment metrics. For investors who want to include it in their analysis, they should consider complementing it with other metrics and indicators to get a more balanced view.