Bitcoin Fear & Greed Index

Investing in volatile markets such as the stock market and cryptocurrency market is quite risky. But, with the help of indicators like the Fear and Greed Index, you can understand the sentiment of the market and the possible trends. Although it’s kind of guesswork, there are chances that you may lose loads of money. 

Due to these risky markets, investors become emotional. Big investors and special traders developed indexes that suggest the investors when to be more daring and when to be more careful. 

In some cases, extreme fear in the market comes when there are big discounts offering buying opportunities. When investors get too greedy, it is an indication that it is the time to sell. 

Warren Buffet once quoted, “Be fearful when others are greedy and greedy when others are fearful.”

What is the Fear & Greed Index?

Fear, greed, and herd mentality are the basic emotions in the stock and cryptocurrency markets. These emotions lead to bull and bear markets. Traders and market analysts use the Fear and Greed Index to understand where the prices go based on market sentiments. 

CNNMoney introduced the Fear and Greed Index to measure the performance of the stocks on a daily, weekly, monthly, and yearly basis. Greed drives the stock price up as the investors start investing in them. Fear drives the price of the stock down when there is a massive sell-off.

When there is excessive greed, the price of the stock will increase to an extent where it is overpriced. When there is extreme fear, the stock price can plummet to the undervalued zone. Similar to the stock market, the cryptocurrency market is emotional as well.   

When the crypto market is bullish, investors invest in the market due to the Fear of missing out (FOMO). While the crypto market is bearish, the same investors will dump all their cryptocurrencies.

How is it measured?

The Fear and Greed Index is measured using these 7 indicators:

Market Momentum

This indicator determines the number of stocks reaching new highs versus new lows and the increasing share volumes versus decreasing share volumes.

Stock Price Strength

This indicator determines the number of stocks hitting highs against the number of stocks hitting lows in a period of 52-weeks on the NYSE.

Stock Price Breadth

This indicator determines the increasing stock volumes against the decreasing volumes on the NYSE.

Stock Market Options

This indicator determines how much the put options lag behind call options or how much do they surpass them. When the put options lag behind the call options, it is greed, and when the put options lag surpass call options, it represents fear in the market. 

Market Volatility Index

This indicator indicates the predictions for volatility over the next 30 days. When this indicator is high, it represents fear. When this indicator is low, it represents greed.

Junk Bond Demand

This indicator determines the rate at which traders invest in high-risk assets. When investors adopt this trading strategy, it represents greed in the market. 

Safe-Haven Demand

This indicator determines the rate at which traders will adopt safe strategies, looking for low-risk assets. 

Each indicator is measured on a scale from 0 to 100. The Fear and Greed Index will be obtained by calculating the average of the 7 indicators score. A score 0 means extremely fearful and 100 means extremely greedy. 

What is Bitcoin Fear & Greed Index?

Alternative.me represents the Bitcoin Fear and Greed Index. When there is extreme fear, the investors are too worried and it may lead to a buying opportunity. When the investors are too greedy, it may lead to a huge number of investors selling off their Bitcoins.

bitcoin fear & greed index

Source: Alternative.me

The above image represents the Bitcoin Fear & Greed Index of 1 year. In the image, when the index value is below 20, it represents extreme fear. And when the index value is more than 60, it represents extreme greed.

As per the graph, the index value was below 20 from 9 March 2020 to 24 April 2020. During the same time, the Bitcoin price also fell from $9,087 on March 5 to $4,650 on March 16. So, this represents extreme fear.

Also, on 11 August 2020, the Bitcoins Fear and Greed Index was at a value of 84, that represents the extreme greed. During this time, the Bitcoin price was high at $11,839, it means that this was the time when the traders could sell off their Bitcoins.

How is Bitcoin Fear & Greed Index measured?

There are 7 indicators that determine the value of the Bitcoin Fear & Greed Index. They are:

Volatility (25%): If there is an unusual rise in the volatility, it represents extreme fear. The current volatility and maximum drawdowns of bitcoin are compared with the corresponding average values of the last 30 days and 90 days.

Market Momentum (25%): This indicator measures the ratio of the market momentum and current volume to compare it with the last 30 and 90-day average values. High-volumes usually corresponds to a greedy market. 

Social Media (15%): The Twitter sentiment analysis collects posts on various hashtags for the coin to analyze the speed and number of interactions in a specific time. If there is a usual high Twitter presence, then it represents a greedy market.

Surveys (15%): Alternative.me organized a large number of polls on various platforms and collect the data on how the people see the market. On average 2000-3000 votes per poll are received. 

Dominance (10%): A rise in Bitcoin dominance is because of the fear of too speculative altcoin investments. A fall in Bitcoin dominance occurs when people become greedy and invest in more risky altcoins.

Trends (10%): It is the Google Trends data for various Bitcoin-related search queries.  A sudden rise in specific keywords represents the current cryptocurrency market sentiment. For example, if there is an increase in the search volume for “Bitcoin scam” it is a clear indicator of extreme fear. 

Advantages of Bitcoin Fear & Greed Index

  • One of the main advantages of the Bitcoin Fear & Greed Index is that helps to analyze the volatile market which would otherwise be immeasurable. 
  • Crypto traders should regularly analyze the status of the cryptocurrency market to know whether it is oversold or overbought. 
  • Gold, silver, oil, and other commodities also use such indicators. So, it is possible to correlate the crypto market and these finite resources market. 

Disadvantages of Bitcoin Fear & Greed Index

Bitcoin Fear & Greed Index does not represent a single truth. It compiles the available data into a metric that will make sense of data at a certain point in time. For example, Fear may not correspond to a great time to buy. Similarly, greedy does not mean that investors should sell. 

This type of index is hard for common people to understand. There are many types of fears, so it is hard for laymen to make sense of a fear and greed index. So, the investors should thoroughly understand the index from both the ends of a spectrum, whether it is overbought or oversold.

Final Word

With the help of the Bitcoin Fear & Greed Index, investors can understand the sentiment of the market and the possible market trends. The traders and market analysts use such indexes to come up with hypotheses about where the prices might go based on the market’s sentiment.