Bitcoin Fear and Greed Index

Bitcoin Fear and Greed Index
November 1, 2021 0 Comments

Bitcoin Fear and Greed Index

The Fear & Greed Index is one of the main indicators of the state of the Bitcoin (BTC) and other cryptocurrencies market. This index helps assess market trends and investor sentiment. After all, investors, like all people, have emotions. The digital asset market is largely driven by emotion (hence the term “market sentiment”). This fact contributed to the creation of special indexes that help to understand which situation you need to be more careful in and when you can act more boldly.

How the Fear & Greed Index Works

The Fear & Greed Index has become an indicator of the state of the cryptocurrency market and the demand for Bitcoin (BTC). Its principle of operation is based on an idea that was once voiced by American entrepreneur Warren Buffett: “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” The indicator allows you to measure how much the market is currently set to buy or sell an asset. For example, if the market is “greedy,” it means that it is potentially ready for a correction or the start of an active sale. If the market is characterized by “fear,” you should consider the convenient opportunities to buy the asset.

The Fear & Greed Index performs well both on the crypto market and on the stock exchanges because the emotions of investors in both cases are similar, and this is undoubtedly reflected in the rates of currencies or stocks.

There is such a thing as FOMO — fear of lost profits and missing the right moment to buy or sell an asset. Many traders experience FOMO when the market rallies and becomes more “greedy.” But the oversupply of buyers cannot last forever, which means that the instrument is waiting for a correction.

Most investors do not know for sure whether the price of BTC will go up or down and therefore feel insecure. Investors want to see a more or less reliable indicator to prompt them to do the right thing. It is impossible to determine price movements in the short term with a 100% probability, but the Fear & Greed index is one of those tools that help you make more informed decisions and plan your tactics for the near future.

The Fear & Greed index is used mainly for BTC in the cryptocurrency market because all other digital instruments correlate with it. When the BTC rate rises, many altcoins also show an upward trend in price and vice versa.

Where You Can See The Fear & Greed Index

The Fear & Greed Index is not the most common index; therefore, it is not included in the list of standard indexes on exchanges. But at the same time, he has many of his supporters, both among those who create sites containing the Fear & Greed index and those who actively use these sites.

You can track it in real-time on the following services:

  • Alternative;
  • Bitstat;
  • Intotheblock, etc.

For example, the Intotheblock service, based on several dozen criteria, determines whether fear or greed now dominates the market. It also displays up-to-date and detailed information about the BTC market:

  • percentages of different categories of holders;
  • share of large holders;
  • volumes of large transactions.

What Factors Shape the Fear & Greed Index

The Fear & Greed Index is a complex index that is formed as a result of analyzing information about BTC and other cryptocurrencies:

  1. The volatility of BTC. This is the baseline, accounting for approximately 25% of the Fear & Greed Index. Developers measure the volatility of a cryptocurrency and compare it to averages over 1 or 3 months. If there are high fluctuations in the exchange rate, then the market is unstable — this is a sign of “fear.”
  2. Cryptocurrency trading volume and momentum. The total trading volume is measured, followed by the buying and selling volumes, which show momentum. If the volume of sales is higher than the volume of purchases, it is “fear,” and if it is the other way around, it is “greed.” The indicator provides another 25% of the information for the formation of the index. The data is compared with the averages for the same period as in the first paragraph.
  3. Social media analysis. The analysis is based on Twitter data as messages on this platform are adapted for machine analysis using hashtags. The developers look at how many messages with the hashtag “Bitcoin” were posted and how quickly they responded. If there are a lot of tweets, and the reaction is fast, “greed” grows.
  4. Analysis of Google Trends. When working with Google Trends, developers take into account the total number of queries and queries that are gaining popularity. The calculation includes not only the volume but also the content of the requests. Therefore, if the request “BTC will collapse soon” is gaining popularity, then this is a sign of “fear,” not “greed.” Google Trends and Twitter provide another 25% of the data.
  5. Information from polls. Through strawpoll.com, the creators of the daily index poll the opinion of 2-3 thousand people about BTC, the market situation, and possible price movements. The influence of market participants’ opinions on the Fear & Greed index is estimated at 15%.
  6. BTC market share (percentage of coin capitalization of the total market capitalization). Because users perceive BTC as a relatively stable and reliable object of investment, the growth of investment in this coin indicates “fear” (investors are afraid to “burn out” on altcoins). If there is a rapid growth in the capitalization of altcoins with a decrease in the share of BTC, this indicates an increase in “greed” (depositors want to make a profit at the expense of altcoins). Market share provides the last 10% of the information needed to form the Fear & Greed Index.

All indicators and an assessment of their impact on the formation of the general Fear & Greed index were introduced by the index developers themselves and analyzed by them. How objectively the Fear & Greed index reflects the actual situation on the market depends only on the work of these people.

Fear & Greed Index Indicators Decoding

When decoding the indicators of the Fear & Greed index scale, traders should be guided by the principle “from the opposite” (as the developers advise).

If the Alternative scale shows that the arrow on the counter has dropped to red (“fear”) and the BTC rate is falling, this is a good time to buy cryptocurrency because you can buy BTC at a low price.

If the arrow goes off the scale in the green zone (“greed”), then this shows the excessively “greedy” behavior of the participants and the approach of correction. In the green zone, it is better to sell BTC and take profit in anticipation of a decline in value.

Fear & Greed Index Pros and Cons

The Fear & Greed Bitcoin Index helps to better understand market sentiment and determine what trends await it. Analysts and traders can build various hypotheses based on their performance. The Fear & Greed index is calculated by calculating average data on trading volumes, market activity, price spread, volatility, etc. However, it cannot be called 100% accurate, so it is advisable to use other technical analysis indicators as well:

  • moving averages;
  • Bollinger lines;
  • MACD, etc.

To see a more complete picture of the market, you must combine various technical and fundamental analysis methods.

The main disadvantage of the Fear & Greed index is that it does not have exact values. It is a compilation of data collected from various sources. An analysis of the history of the Fear & Greed Index since its inception in 2018 shows that it did not always display the best times to buy or sell BTC.

Also, some investors have difficulty understanding the Fear & Greed Index. For example, FOMO is often confused with “greed.” Therefore, it makes sense to perceive the Fear & Greed indicator exactly as a scale that displays the ratio of purchases and sales in the market and nothing more.

The Fear & Greed Index has both supporters and opponents. Proponents point to a good correlation between the BTC rate and the Fear & Greed Index. Opponents argue that possible coincidences are accidental, and the chosen calculation method does not show an objective picture of the market.

It is difficult to prove which of them is correct. But you can test this tool at work to understand whether it is right for you or not.

When using the Fear & Greed Index, the investor should not take it as the ultimate truth and guide action. The Fear & Greed Index is just conveniently collected information based on which you can draw your own conclusions. In addition, if you decide about future investments, then this indicator is not suitable because it only shows the current market sentiment.