Beginner Guide: What Is The Crypto Greed and Fear Index?
There are numerous methods to predict the market pattern, such as technical analysis, fundamental analysis, and sentimental analysis. The crypto greed and fear index belongs to the third, which is a strong method to determine the emotion of investors. But not everyone can use it, especially beginners. In this article, Tokenize Xchange would indicate every detail about this term for beginners to understand.
What is the crypto greed and fear index?
The greed and fear index is an indicator of market sentiment which helps predict market behavior. Firstly developed originally for the stock market by CNNMoney according to Investopedia, it provides a way to measure how greedy or fearful people are when it comes to investing in crypto.
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The index for bitcoin and other cryptocurrencies was calculated based on analyzed data from a variety of sources. It not only gives people advice on how emotional the current market is but also saves investors from overreaction. Moreover, it plays a role in determining if the market is fairly priced on a daily, weekly, monthly, or yearly basis.
How does it work?
There is a scale of 0 to 100, which is related to two opposite assumptions: 0 means “Extreme Fear” and 100 means “Extreme Greed”. A low score means fear takes over the market, a higher score indicates that investors are becoming greedy.
In specific, there are 5 measurement ranks including Extreme fear, Fear, Neutral, Greed, and Extreme greed. Which have scores varying from 0 to 30, 31 to 49, 50, 51 to 75, and 76 to 100, respectively.
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When it comes to Fear and Extreme fear, selling orders overpower the market. So that is a good time to buy and stock more coins.
On the other hand, FOMO might happen, leading to unstoppable buying orders. So it would be a great opportunity to sell coins at a high price.
The crypto greed and fear index is calculated based on analyzed data of six basic factors, including Market momentum/Volume, Social media, Volatility, Trends, Dominance, and Surveys.
- Market momentum/Volume: Accounting for 25% is market momentum or Volum. Market momentum compares the average of the last 30 and 90 days to Bitcoin’s current market volume and market momentum. When upward momentum is high, it may suggest that the market is bullish.
- Social media: Social media takes 15% of the pie. This is currently focused on Bitcoin-related Twitter hashtags, with a focus on the amount and pace of interactions. A higher-than-normal interaction rate is interpreted as evidence of opportunistic market behavior.
- Volatility: Volatility makes up a quarter of the index. It calculates the current Bitcoin price and compares it to 30-day and 90-day averages. This is used by the Index as a proxy for market fear.
- Trends: According to Google Trend statistics for various Bitcoin-related queries, trends account for 10% of the total.
- Dominance: With the percentage of 10%, dominance is a metric that determines how much of the total cryptocurrency market capitalization Bitcoin takes up. The greater Bitcoin’s dominance, the less speculation there is for altcoins, which could indicate investor bearishness.
- Surveys: Surveys used to contribute the last 15%, but it was recently suspended. The results are conducted from weekly polls to find out what people think about the markets.
How to predict the market by using crypto greed and fear index
It may be hard to understand the usage of this index. Let’s take Bitcoin as an example. On 30th Sep 2021, the Bitcoin greed and fear index dropped down to 20, which was considered as a fear region. Since then, BTC price decreased significantly to $41,000 by a mast amount of flash sell orders. It means that the whole market was doubting about the collapse of bitcoin, so investors tend to sell their coins to preserve the capital.
1 week later, the greed index grew up gradually to 76 on 7th Oct, as the greed rank. The market was restored and trending up. FOMO happened, leading to the rising of BTC to $55,000. Finally reached the peak of 66k with a very high level of greed at 84 on 21st Oct.
Therefore, traders can partially predict the market trend based on the greed and fear index.
There are a variety of analytical tools for one unique purpose, predicting the market. And the crypto greed and fear index should be one of those. Using this indicator can help investors in building a suitable trading plan for specific situations. Keep following Tokenize Blog for more crypto trading guides!
Cryptocurrencies are subjected to high market risk and volatility despite high growth potential. Users are strongly advised to do their research and invest at their own risk.