Index of fear and greed
The Fear and Greed Index analyzes the emotional state of investors regarding the situation in the cryptocurrency market.
It should be noted that for the first time the Internet community Alternative.me applied this idea to the cryptocurrency market.
An experienced trader, before an important decision to buy or sell crypto assets, studies the situation on the market. Thus, when making decisions, he uses many criteria: technical analysis, charts, market sentiment, as well as fundamental indicators, indicators, and others.
That is, the index of fear and greed analyzes the emotional state of investors regarding the situation in the cryptocurrency market. Thus, he makes it clear the intentions of traders – they are ready to buy or sell an asset. The index indicates the movement of the crypto market with the highest probability.
What it is
In fact, the index of fear and greed is a simple number from 0 to 100. 0 indicates extreme fear, and 100 indicates extreme greed.
Extreme Fear manifests itself mainly in a bear market. That is, he says that investors do not believe in the asset or underestimate it. They start selling it en masse, lowering the price.
That is, those who want to sell become much more willing to buy. This is clearly seen when the indicators in the market are red. Inexperienced investors are afraid that the price will fall more and close positions in the red. Accordingly, large investors (they are also called whales) in a similar situation buy an asset that has fallen in price.
Extreme Greed is more of a bull market. That is, the situation on the market is opposite. So, often in this situation, investors are led by the Fomo syndrome (eng. Fear of missing out or FoMO – a syndrome of lost profits, an obsessive fear of missing an interesting event or a good opportunity). Increased greed leads to excessive demand. This results in unnatural price increases. That is, investors buy an asset above its fair value.
This shows that a novice investor often buys cryptocurrency at a high price and sells it at a low price.
For example, Warren Buffett warned: “Be afraid when others are greedy and be greedy when others are afraid.” In other words, his advice is to buy when everyone is selling and also sell when everyone is buying.
The Fear and Greed Index is currently applicable to Bitcoin. In the future, it is planned to add indices for other major altcoins. But the influence of emotions of fear and greed and the corresponding behavior of inexperienced investors in the market can be traced in relation to other cryptocurrencies.
There are 4 indicators of the index:
- 0–24: intense fear;
- 25–49: fear;
- 50–74: greed;
- 75–100: strong greed
The index is calculated based on the following market criteria in percentage terms: firstly, the market volume (25%); secondly, volatility (25%); then the Bitcoin dominance index (10%), the mention of bitcoin in social networks (15%), Google Trends (10%) and expert polls (15% – this criterion is not currently used).
For example, here are some of the services where you can track the Bitcoin Fear and Greed Index:
The last but nevertheless important point is that the fear and greed index is a necessary tool in analyzing the situation in the cryptocurrency market. However, it should be used in conjunction with other methods. And an integral part of the analysis is your own research.