44. What is the Fear and Greed index for cryptocurrencies?
Cryptocurrencies are very volatile assets. Especially considering that they are speculative assets. Moreover, investor behaviour in the cryptocurrency market is also very volatile. This often leads to FOMO or FUD. The Crypto Fear and Greed Index was developed to analyse the emotions and sentiment prevailing in the digital asset market.
Fear and Greed Index – definition
This is nothing more than a measure of the sentiment of cryptocurrency investors currently in the market. It is presented on a scale of 1 to 100.
The lower the score, the more concerned investors are about the future of the cryptocurrency market. The index is then red. Investors are selling their cryptocurrencies, which leads to price losses. On the other hand – the higher the score, the better the sentiment around digital assets. Greed then occurs – the index is green. Cryptocurrency investors buy assets.
The best way to understand how this works is to look at examples.
- In 2022, the Fear and Greed Index showed “extreme fear” in the digital asset market. The score was only 12/100. The mood in the market at that time was downright serious.
- In contrast, in February 2021, the index showed a value of 92/100, which put the market in “extreme greed“. The whole thing came to a head after Elon Musk promised a gigantic investment in cryptocurrencies. We are talking $1.5 billion here. Unsurprisingly, the price of digital assets shot up as a result.
How do we calculate the Fear and Greed Index?
Several important components affect the index score:
- Recent market volatility. It is calculated based on the volatility and drawdown of the price of cryptocurrencies compared to the recent 30- and 90-day moving averages.
- Trading volume. This is another indicator of demand for cryptocurrencies. If we have high buying volume, it means that “greed” is approaching in the market.
- Social media analysis. They are the best collection of data about people and markets. Therefore, it is not surprising that the data contained in the media is used to create an index. Mentions, hashtags, engagement, reactions or cryptocurrency texts themselves are collected to capture the general prevailing sentiment.
- Google Trends. That is, an analysis of what people are searching for in relation to cryptocurrencies. This analysis gives us an indication of how people think about the market.
Fear and Greed Index vs. Trust.
The Fear and Greed Index helps us understand the behaviour of the cryptocurrency market. However, you need to keep one thing in mind: Investment and trading decisions cannot be made on this basis alone. If you want to invest in a particular cryptocurrency or project, you should do research and conduct fundamental and technical analysis.
Of course, the index represents for us the current sentiment in the market, but it is not and never will be a concrete indicator of the market. Let us look at another “real life” example. In November 2020, the index showed “extreme greed“. According to this index, cryptocurrency investors were supposed to reap huge profits and wallow in luxury. What did it really look like? Both Bitcoin and other cryptocurrencies reached new highs in the following six months.
So, what is the Fear and Greed Index useful for? Usually, the general market sentiment about cryptocurrencies affects their value. Thanks to this index, you can get some interesting insights. It is worth including it in your analyses.
The Fear and Greed Index can also be useful for so-called bargain hunting. For example, extreme fear of the market can be a good opportunity to buy at a lower price. Extreme greed, on the other hand, can be a good opportunity to sell at a good price.
Remember, however, that in both cases the fundamentals of trading have not changed – only the mood of the market has changed.
Fear and Greed Index – cons
The index is not the only indicator that affects the price of cryptocurrencies. It only measures emotions – it is not a holistic view of the market. The Fear and Greed Index does not take into account complex economics, tokenomics or fundamental analysis. You can only use it if you use it together with other indicators and investment tools.
The second disadvantage of the index is that it does not make predictions about future events. The Fear and Greed Index is only based on data from the past. It tells us what emotions are in the market based on what it already knows. Therefore, this index cannot predict the future in the cryptocurrency market.
The Fear and Greed Index is only one small piece of the puzzle that is the cryptocurrency market. However, understanding it will give you a better overview of the market.
Together with other tools and indicators, it allows you to make rational decisions regarding your digital assets. With the Fear and Greed Index you will eliminate FOMO, FUD or other unfavourable things from your trading.
- The Fear and Greed Index examines the mood that currently prevails in the cryptocurrency market.
- It consists of many indicators: Google Trends, social media content or recent market volatility.
- With this tool, you can distinguish between emotions and facts and even identify investment opportunities that are currently on the market.
- It’s worth using it in your daily trading!