The Fear and Greed Index is a tool that helps investors analyze the potential of market behavior based on the sentiment of its participants. CNN Money introduced it in 2012.
The Fear and Greed Index is a scale from 0 to 100, where 0 is the maximum fear and 100 is the maximum greed. The middle, 50, signals neutral market sentiment.
The stock market is the focus of the original Fear and Greed Index. Alternative.me has adapted it for cryptocurrencies.
Fear and Greed Index for Cryptocurrencies
Fear and Greed Index for the cryptocurrency market. Source: Alternative.me
The Fear and Greed Index is refreshed daily. You can follow its indicators by following the link.
What does the index consist of?
The Fear and Greed Index analyzes several indicators, each of which represents a certain percentage. Let’s have a look at them:
25% – Volatility. The index reflects the average price of bitcoin, the most capitalized cryptocurrency, over 30 and 90 days. The information helps to understand the level of certainty of market participants (whether they are actively buying, selling or staying calm).
25% – Momentum and volume data. The index compares bitcoin trading volume and market activity over the past 30 and 90 days. The result is a measure of the activity of buyers and sellers in order to determine the predominance of positive or negative sentiment.
15% – Mentions of the cryptocurrency on social networks. The index uses hashtags on Twitter for analysis. The growth of cryptocurrency mentions in social networks indicates an increased interest in coins, which often indicates an increase in greed.
10% is the level of dominance of bitcoin. The growth of the index indicates an influx of new investors, as well as a possible redistribution of funds in the market.
10% – the results of Google Trends analysis. Information about search queries, which can be obtained through Google Trends, also allows to analyze the sentiment of market participants. For example, an increase in the number of queries about crypto scams may indicate a growing fear of crypto.
15% – the results of surveys. This parameter is temporarily not used in the calculation of the Fear and Greed Index, according to the official website of the index authors.
How to read the Fear and Greed Index
To understand the index, plug in logic: the greater the fear of crypto – the fewer buyers, because investors rarely buy assets in which they have doubts. That said, extremes in the Fear Index can be an indicator of a good entry point into the market for long-term investors
Maximum greed can be a harbinger of an overbought cryptocurrency market. At such times, there is a risk that prices will fall.
The Fear and Greed Index is rated on a standard scale:
0-24: strong fear. The color is orange.
25-49: fear. The color is yellow.
50-74: greed. The color is light green.
75-100: intense greed. The color is green.
To see how the index signals work, it helps to overlay it on the bitcoin chart. Peaks of BTC usually occur at the maximum greed and lows at the extremes of fear.
