How to Measure the Crypto Greed and Fear Index
A good investor will search for supportive data when making decisions about buying or selling cryptocurrencies. There are various market indicators to look at and understand the market sentiments.
The crypto fear and greed index provides a glimpse of market sentiments and fundamental metrics. Though this indicator alone will not help you analyze the market, it can help you analyze the overall emotional behavior of the cryptocurrency markets. Noticing changes in the fear and greed index can be a part of your trading strategies for choosing when to enter and exit the crypto market.
Note: the crypto fear and greed index is a weighted measure of market data that considers market indicators. It is not something that can be purchased or any kind of financial instrument. It is just a market indicator that can supplement your analysis. Oftentimes, crypto research depends on analyzing social media, the community, and public opinion. So, the sentiment analysis by the fear and greed index will be helpful for this asset class.
What is the Crypto Greed and Fear Index?
Originally the fear and greed index was created by CNNMoney to analyze market sentiments for stocks and shares. Alternative.me has made a version of the fear and greed index customized to the crypto market.
The crypto fear and greed index analyses different trends and market indicators and concludes whether market participants are feeling fearful or greedy. It shows a score from 0 to 100 to represent the crypto market sentiment. A score of ‘0’ indicates that the market is extremely fearful and a score of ‘100’ indicates extreme greed. The market is perceived to be neutral if the score is 50.
When the score is between 0 to 49, the market is said to be fearful. This could be an indication that the cryptocurrencies are undervalued and there is excessive supply in the market. Extreme fear can lead to overselling and panic. This could mean that the market has entered into a long-term bearish trend. This can be considered as a short or mid-term reference to overall crypto market sentiment.
When the score on the crypto fear and greed index is between 50 to 100, the market is in the opposite situation. When the traders are greedy, there are chances of overvaluation of cryptocurrencies and a possible bubble. In the case of the greed market, investors might pump the markets by overvaluing cryptocurrency’s price. Excessive greed may lead to excess demand and inflate the price.
How to Measure Crypto Greed and Fear index?
Alternative.me calculates a new value from 0 to 100 every day for Bitcoin. The crypto fear and greed index only uses BTC-related information for analysis as of now. They are using only Bitcoin’s information because of its correlation with the whole market in terms of price and sentiment. They are planning to cover other coins like Ether and BNB in the future. The categories in the index’s scale are divided as:
0-24: Extreme fear
75-100: Extreme greed
The crypto fear and greed index is measured by taking five different weighted market factors into account. Let’s review the five weighted market factors.
Volatility is one of the important market factors. It helps measure the current value of Bitcoin by averaging its previous value from the last 30 and 90 days. Volatility occupies 25% of the index. It is used as a replacement for market uncertainty.
The current trading volume and market momentum of Bitcoin are compared with the last 30- and 90-day average value and then combined. The market volume also occupies 25% of the fear and greed index. If there is a constant high-volume buying, then it indicates positive or greedy market sentiment.
Social media results also help in measuring the fear and greed index. This market factor considers Twitter hashtags related to Bitcoin and the interaction rate. Social media has a share of 15% in the fear and greed index. If there are constant high interactions related to the market, it indicates more greed than fear.
This market factor measures Bitcoin’s dominance. If the Bitcoin dominance increases, then it is possible to have new investments and reallocation of funds from altcoins. Bitcoin dominance comprises 10% of the overall crypto fear and greed index.
Google trends data for Bitcoin-related search queries provides insights into the market’s emotional behaviour. For instance, if the number of searches for ‘Bitcoin scam’ increases, then it would indicate market fear. The Google trends market factor has 10% of the index.
In addition to these five market factors, survey results are also considered. However, surveys are paused currently for some time. Otherwise, the results of surveys contribute to the overall index score by 15%.
Greed and Fear Index for Long-Term Analysis
The crypto fear and greed index does not work for a long-term analysis of the crypto market. There might be multiple cycles of fear and greed within a bull or bear run. The fear and greed index is more useful for swing traders. But it will not help investors predict the change from a bull market to a bear market.
Investors need to consider other market aspects to get a long-term perspective. It is advisable not to depend completely on one indicator or one style of analysis. Doing your own research is important.
The crypto greed and fear index is a straightforward way to summarize a range of fundamental market sentiment metrics. To get a more balanced view of the market, consider complementing the fear and greed index with other metrics and indicators.