The Crypto Fear and Greed Index generate a single value between 1 and 100. If the value = 1, which means that the crypto market will fall as people are experiencing severe fear and selling their holdings.
Crypto Fear and Greed Index measures the sentiment of the cryptocurrency market. While it is an indicator of the overall market sentiment, an investment decision has to be based on several other inputs.
We can say that people tend to get greedy when the market is rising which results in FOMO (fear of missing out). Also, people often sell their coins in an irrational reaction to seeing red numbers, as said by Alternative.me, the company that has come up with the Crypto Fear and Greed Index to analyze emotions and sentiments from different sources and quantifies them.
Based on a measurement of investors’ sentiments towards the crypto market, the Crypto Fear and Greed Index indicates whether the market is bullish (high) or bearish (low). ‘Extreme fear’ means that investors are very worried, but it could also mean that this is a buying opportunity.
How does Crypto Fear and Greed Index work?
Extreme fear arises when the value of the index lies between 0 and 24. Anything above 24 and under 50 represents fear, and the value of 50 means neutrality in the market. On the contrary, greed arises when the value of the index lies between 51 and 74, if the value hikes over 74, such as 75 or above, it represents extreme greed.
In other words, the crypto Fear and Greed Index has scores in the range of 0 to 100. A lower score indicates more fear in the market, which means more investors are selling, causing the cryptocurrency market to fall. A higher score means that greed is high and people are buying.
How is Crypto Fear and Greed Index calculated?
Various Crypto Fear and Greed Index signals that influence the behavior of traders and investors include Google trends, surveys, market momentum, market dominance, social media, and market volatility. To determine how much greed is trending in the market, examine trending search phrases. For instance, a high volume of Bitcoin-related searches means a high degree of greed among investors. This factor accounts for 10% of the index value.
Historically, increases in Bitcoin-specific Google searches have been correlated with extreme volatility in crypto prices. To calculate the number each day, the Bitcoin Fear and Greed Index considers a few other factors, such as surveys, which account for 15% of the index value. Surveys with participants of over 2000 drive the index value higher, indicating the presence of greedy investors.
Likewise, market momentum refers to the market's ability to maintain a long-term price trend and represents 25% of the index value. This examines the market's health and direction. The index's greed side takes momentum into account. Dominance examines the cryptocurrency's market dominance in the overall crypto industry. For example, the greater Bitcoin's dominance, the fewer alternative cryptos exist. However, a drop in Bitcoin dominance suggests increasing greed and accounts for 10% of the index.
Balancing Greed and Fear to be a Successful Trader
Price swings are less noticeable on prominent (or large) trades and this makes large transactions more stressful. Therefore, it is crucial to lessen the size of your trade to balance your emotions and trading decisions. Having a clear trading plan is the path towards being a successful trader. Without a plan, one could risk losing money due to over-leveraging their crypto portfolio. Recording trading activities to understand what is working for you or vice-versa helps you to make rational decisions. The trading journal helps you to learn from your own mistakes, and practice makes one perfect.
If you are a long-term investor and you rely upon the Crypto Fear and Greed Index, you may miss significant price rallies. On the other hand, the Fear and Greed Index is a valuable tool for a day trader who plays different buy and sell positions within a short time. If you have chosen to be a day trader (based on the Fear and Greed Index), then you should also be aware that any income from crypto trading is subject to the capital gains (short-term) tax.
Thus, you are a fundamental trader, and you want to use the Fear and Greed Index to guide your investment decisions; then, you may end up losing your money because the index is suitable for technical traders. Although the Fear and Greed Index provides insights into the state of the crypto market at the exact moment it portrays, individual traders or investors should do their research concerning the tools suitable for their investment goals.