Fear and Greed Index in Crypto
As said in Investopedia, the term “fear and greed index” was initially developed by CNN Money in order to measure and quantify two of the prime emotions that attract investors to the market and impact the price that they are willing to pay for stocks. This index is measured every single day, every week, every month, and an annual timeframe, which can be effectively used to estimate whether the stock market is rationally priced.
It finds its basis in the logic that too much fear would result in a depression of stock prices lower than their fair value, while too much greed might make the exact opposite occur. The fear and greed index by CNN measures seven indicators, they are market momentum, junk bond demand, put and call options, stock price breadth, market volatility, stock price strength, and safe-haven demand.
What is Crypto Fear and Greed Index?
Alternative. me, the founder of the Crypto Fear & Greed Index, expresses it in the following way: “With our Fear and Greed Index, we try to save you from your own emotional overreactions.”
The index provides an analysis and helps measure the emotion and sentiments of people who have invested in and involved themselves with large-cap cryptocurrencies from various sources such as Bitcoin. When this article was written, the crypto fear and greed index had been displaying greed and had a score of 71.
Alternative. I further provide an explanation that states that its conclusions are derived and based upon two essentially simple assumptions: “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 the irrational reaction of seeing red numbers.” This basically displays that, a lot of investors (obviously not the smart ones) tend to sell low but buy high.
Why Measure Fear and Greed?
The crypto market behavior often inclines to turn out very emotional. People often find themselves turning greedy whilst the market is on the rise, resulting in acute fear of missing out (FOMO). Moreover, people tend to sell their coins away, an often-irrational reaction of being scared of red numbers on the prices. When an investor is equipped with the Fear and Greed Index, they are often miraculously saved from them overreacting to their own emotions. The Fear and Greed index runs on the following basic assumptions:
Extreme fear tends to be a sign of investors being too worried to invest. Thus, this makes for an opportunity to buy.
When investors are displaying the sign of being too greedy, it means that the market is due for a correction to set itself right.
Hence, the index analyses the current sentiment of various crypto markets and calculates and crunches the numbers so as to resultantly create a simple meter that ranges from 0 to 100. A ‘0’ stands for “Extreme Fear”, whereas a ‘100’ stands for “Extreme Greed”. Immediate Connect is one of the cryptocurrency official websites in 2023.
Data Sources
The data for the Fear and Greed index is collected from the following five sources. Each data point retains the same value as the day before so as to visualize evocative progress in a change of sentiments throughout the crypto market.
Below listed are all the distinctly different factors that are included in the current index:
Volatility (25%)
The volatility factor measures the current volatility and maximum drawdowns occurring for bitcoin and helps provide a comparison of it against the equivalent middling values for the past one month and three months. It is said that an unusual rise in volatility foretells a fearful market.
Market Momentum/Volume (25%)
The next measure of the Fear and Greed index takes account of the current market momentum and volume (once again, while comparing it with the last one/three-month middling values) and is crunched and put together as one value. Typically, when high buying volumes are abundant inside a positive market regularly, it can be concluded that the market behaves too greedy or too bullish.
Social Media (15%)
Although the Reddit sentiment analysis has not yet been available in the live index (there are still experiments being run for some market-related keywords that lie in the text processing algorithm), the twitter analysis is available and running. The Twitter analysis brings together so as to count posts that have diverse hashtags relating to each coin (publicly, only those of Bitcoin are shown) and it is checked how many and how fast interactions are they receiving within particular time frames). An unusually high interaction rate points to a growing public interest in the coin and hence relates to essentially greedy market behavior.
Surveys (15%, currently paused)
Surveys basically make use of massive public polling platforms and conduct regular crypto polls and ask investors or any survey participants how they view the crypto market. Generally, a decent survey should generate 2,000 – 3,000 votes from each poll, so as to paint a picture of the sentiment of the collective crypto investors as accurately as possible. Although such results are often vague and do not help much in measuring the index, it is made sure to not receive much attention, despite proving to be of quite some use during the early beginnings of the analysis.
Dominance (10%)
The impact of the dominance created by a crypto bear a resemblance with the market cap share of the entire crypto market. Especially for Bitcoin, a rise in its dominance is set off by a fear of (and resultantly a decrease in) extremely speculative alt-coin investments, since Bitcoin is turning to be more and more a haven for a crypto investor with every passing day. On the other hand, when the dominance of Bitcoin decreases, people start to turn greedier by investing in alt-coins that pose high risks, daydreaming of their opportunity in the next grand bull run. As a result, analyzing the dominance of any crypto except Bitcoin generates more interest in an alt-coin which results in a conclusion of the emergence of bullish or greedy behavior for that particular coin or the other way around.
Trends (10%)
When the Google Trends data is pulled out for several Bitcoin-related search queries and those numbers are crunched, there results in significant changes in recommended other currently popular searches as well as search volumes. For an instance, if you were to check Google Trends for “Bitcoin”, you are likely to not receive such information from the search volume. But presently, it has been noticed that there is currently a surge in the query of bitcoin price manipulation by a whopping +1,550% as stated: “in the box of related search queries (as of 05/29/2018)”. This indicates the possible rise of fear in the market, and hence it is evaluated and accounted for in the index.
Crypto Fear Is Making A Return
The renowned Bitcoin Fear & Greed Index is a way of measurement that depends on various factors throughout the digital asset community to divulge the transitory sentiment towards the chief cryptocurrency. Such factors include volatility of the crypto, surveys, social media comments, volume, and more. The Index results in values ranging from 0 (“Extreme Fear”) to 100 (“Extreme Greed”). Presently, the metric has turned out a fearful 34 – the “Fear” territory.
Remarkably, the last time the Index turned out into this current state was October 1, 2021. Back then, the price of each bitcoin was approximately $42,000. During October, though, the cryptocurrency went through notable surges, with probably the most noteworthy one being the event where ProShares Bitcoin Strategy ETF was launched– the first ETF in the United States that was future-backed. Shortly after, the digital asset’s USD value skyrocketed and reached an all-time high of nearly $65,000.
Other factors that helped the bitcoin soar within the last two months included reassurance from the Federal Reserve and the SEC that the US does not look forward to banning cryptocurrencies.
Moreover, the Russian government too announced that an absolute ban on cryptocurrencies (basically what China did) is not an item on its agenda. President Putin even remarked that Bitcoin and the alternative coins may one day achieve be on par with other means of payment.
The initial ten days of November too proved to be quite successful for BTC. Just last week, the BTC soared to a new all-time high of valuation at around $69,000, whereas its market capitalization reached a whopping $1.3 trillion for the first time ever.
Nevertheless, the cryptocurrency industry underwent a significant rectification in the past week, and it resulted in Bitcoin losing a little serious ground. if you are looking for crypto trading bittrader is one of the best platforms for crypto trading.
A Final Word
Although the word “Fear” is enough to imagine a cautionary stop sign that will make some people unwilling to begin their venture into the digital asset market, it is not so every single time. A plethora of experts in the space believes that the current state of “Extreme Fear” of cryptocurrency might actually make for a good buying opportunity.
The third-largest bitcoin ‘whale’ seems to share the same opinion, and two days ago, they went on to buy another 1,647 BTC priced at less than $60K. The net amount amounted to nearly $100 million.
