Predicting cryptocurrency market movements may be close to an impossible task, however there are specific indicators like the Fear and Greed Index that have proven themselves to be relatively reliable in doing so.
The term Crypto Fear and Greed Index is widely used by crypto analysts, traders and pundits. If you have been following cryptocurrency for some time you are likely to have heard it at some point.
What is the Crypto Fear and Greed Index Indicator?
The Crypto Fear and Greed Index is a metric that was designed to measure the crypto market sentiment at any particular point in time. The measurement is based on a numerical value between 1 and 100, where 1 would show that the cryptocurrency market in in extreme fear and people are selling or likely to sell. If the Fear and Greed Index shows 100, that would mean that the crypto market is in an extremely high state of greed and people are buying crypto assets.
Typically the Crypto Fear and Greed Index is used by investors and traders to purchase crypto when the fear level is high or closer to 1. The reason being that at a high level of extreme fear in the crypto market, the prices may be at or near a low as investors and traders were not buying the digital assets and the prices would be lower representing a potentially good entry price.
If the Crypto Fear and Greed Index is at or near 100, that shows extreme greed in the crypto market. This indication may be used by investors and traders as a sell opportunity as prices may have peaked and could potentially fall lower soon. One way to think of this is a hot real estate market, where everyone is competing with each other to get in and therefore driving the price up in value. The hysteria (or greed) will not last forever and prices will likely fall when it subsides.
The Crypto Fear and Greed Index has become popular amongst crypto traders and investors to help in their decision of when to buy and when to sell their crypto holdings. In short, when the Crypto Fear and Greed Index is very high, you may want to consider selling some or all of your crypto holdings and when the index is low, you may consider purchasing or accumulating more crypto in your portfolio.
What data is the Crypto Fear and Greed Index comprised of?
There are several metrics that create the reading on the Crypto Fear and Greed Index.
- Momentum and Volume: This is the measurement of Bitcoin’s momentum and volume, where lower momentum and volume levels are seen as a positive and higher momentum and volume are seen as a negative or adding to fear. This metric is 25% of the overall index measurement.
- Volatility: The index looks to see the volatility and max draw-downs or a decline in valuation against the 30 and 90 day averages for volatility and drawdowns. Higher levels of volatility are considered to represent fear and would increase the fear level on the index. This metric is 25% of the overall index measurement.
- Surveys: The Crypto Fear and Greed Index actually conducts surveys of the crypto markets each week. Typically the survey is comprised of around 2,500 participants. If the results of the survey show enthusiasm for the price of Bitcoin and crypto, that adds to the greed measurement and negativity would add to the fear measurement. This metric is 15% of the overall index measurement.
- Social Media: This metric tracks hashtags and social media mentions of Bitcoin, then compares the amount to previous averages. Higher hashtags or mentions would represent higher interest level in the crypto industry and add to the greed measurement. This metric is 15% of the overall index measurement.
- Trends: This metric looks at Google searching trends compared to previous averages. The higher the amount of searches the more greed is considered to be in the market and that would push the index more towards the greed side. This metric is 10% of the overall index measurement.
- Dominance: This metric compares Bitcoin’s market cap dominance compared to alternative cryptocurrencies or altcoins. When Bitcoin dominance is lower, that means more people are feeling confident in crypto and putting money in altcoins, which they may feel is too risky when they are not confident in the overall market. The lower the Bitcoin dominance, the more the market is considered to be on the greedy side. This metric is 10% of the overall index measurement.
Does the Crypto Fear and Greed Index work as a indicator of market direction?
This is a difficult question to answer as no one indicator should be used to make investing and trading decisions. Historically however the price of Bitcoin has closely followed the Crypto Fear and Greed Index value in the short term. Where a lower Bitcoin price seems to correlate to a lower Fear and Greed Index and a higher bitcoin price tends to correlate to a higher Fear and Greed Index indication.
It should be noted that the Crypto Fear and Greed Index is a technical analysis tool and not a fundamental analysis tool. It is not measuring the overall outlook for the crypto markets, positive or negative news or events any other metric outside the 6 mentioned above.
*The views and opinions expressed here are solely those of the author and do not necessarily reflect the views or opinions of BumbleBeeCrypto.com, nor should they be considered financial advice. Every investment and trading action incurs risk, we advise you to conduct your own research when making any trading, investment of financial decisions.