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Crypto Greed and Fear Index: Is This Indicator Reliable?

crypto greed and fear index
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A peak of 95, last seen on Feb 17, 2021, has slipped to a crypto fear of 10 on June 3, 2022, after numerous bumpy and jumpy paces. Due to crypto’s volatile nature, a more than 90% fall in 16 months is not surprising. What does the crypto greed and fear index tell you about cryptocurrencies in the future?

Crypto investors are jaw-dropping about the fall of 64.7% since the beginning of this year. Yes, it is an extremely fluctuating market where information and transactions flow faster than we can catch.

If you intend to be a cryptocurrency investor, you may be bewildered while confronting the market tempos and data fluidity around news and social media channels. A measure related to the crypto market is here for the public to understand better.

What is the Crypto Greed and Fear Index?

Unlike stock or bond indexes, the crypto greed and fear index is a source-combining gauge indicating and measuring market emotions and sentiments. Like a stock market index, it generally reflects the mood and atmosphere of different crypto markets.

Created by “alternative. me”, the index focuses on two assumptions. The first is an “Extreme Fear” situation. People are exceedingly fearful of the crypto collapse, exiting markets and seeking refuge. The market is full of despair and panic emotions.

Some argue that the fear market is a signal for a buying opportunity. They advocate that investors should take advantage of this situation, buy at the bottom, and wait and profit from the next rising tide.

In contrast, the second one is an “ Extreme Greed.” When the market is blowing up at full speed, people are heading into it so they don’t miss profiting opportunities just around the corner. As a result, the fear-of-missing-out mood propels the market, creating a high greed index.

Yet, some view that the market is heading towards the cliff and a step short of falling off. They suggest investors should sell their cryptos and go out of the market because a correction is not far away.

Based on the current sentiment of the bitcoin market, “alternative. me” integrates and apportions various sentiment sources and devises a numerical system from 0 to 100 to reflect the market sentiment. A parameter of 0 reflects the market is extremely nervous and fearful. A parameter of 100 indicates the market is in an exceedingly greedy mode. An index of 50 suggests it is neither fearful nor greedy.

The index’s recent fall to 10 indicates that the market is in panic due to the TerraUSD and Luna collapse on May 22. For example, one of the institutional investors, Ms. Cathie Wood of the Ark ETF, has claimed her fund has bought cryptocurrencies in the market.

How to Calculate the Crypto Greed and Fear Index

Focusing on the bitcoin market, the index sponsor collects and allocates weights to 6 sources to create a metric closely reflective of the market sentiment. They constitute the index value as follows.

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Volatility

Volatility is a primary source of the index. It measures the volatility of the bitcoin market, including maximum drawdowns of the cryptocurrency, and compares the crypto to its corresponding average values over the past 30 a.nd 90 days. The aim is to generate price patterns by the rate of the bitcoin’s withdrawals over its underlying time-weighted values.

When the parameter increases, more investors are fearful and exit the market. If the volatility index reduces, the market is optimistic that crypto prices will rise soon, and more people will join the games. The volatility metric makes up 25% of the index composition.

Market Momentum and Trading Volume

The parameter gauges the flow and liquidity of the bitcoin market. When buyers and sellers are active in the market, transactions flow fluently, and liquidity is high.

2 components form the metric. They are transaction volume and market momentum of the past 30 and 90 days. If the indicator goes upwards in the positive territory, the market mood is optimistic and expects the prices to ascend soon. On the contrary, the gauge runs wild in a negative territory though transactions are high in volume and the market is pessimistic, and prices may fall soon. The indicator forms 25% of the index composition.

Social Media

The index also explores and includes the sentiment regarding cryptocurrencies in social media. Twitter is the main venue to gather and count posts under hashtags relating to each cryptocurrency. The index sponsor is still researching on the platform “Reddit” and attempting to use an algorithm to collect market-related keywords for sentiment analysis.

“Alternative. me” explores how many interactions the people in social media receive in a certain period for each crypto. A higher interaction rate means more people are interested in a crypto coin, and the index shows more greed in the market. Conversely, the mood is low. The sponsor only publishes the index for the bitcoin though it is researching others. The social media factor accounts for 15% of the index composition.

Dominance

According to the index sponsor, a dominant position by one type of crypto coin like the bitcoin has a principal effect on other currencies. Bitcoin’s rise in the total crypto market cap share may attract more cash flows from other digital coin markets and result in falls in prices and market cap share of other currencies called altcoins.

On the contrary, if the altcoins rise in value and market cap share, investors will interpret the fear mood in the bitcoin market as prevalent and exit the market correspondingly. The dominance factor counts for 15% of the index composition.

Trends

Crypto trends like bitcoin also form the crypto greed and fear index. The index will pull “Google Trends” data and analyze those information-related queries regarding search volume and “other recommended popular searches” with bitcoins. The “Google Trends” provides valuable information concerning market mood and attitude toward bitcoins.

If negative feelings toward bitcoin are rife in the search results, people will interpret a fear mood as dominant at the time and will leave the market subsequently. Likewise, a positive tone appears more times than otherwise, and investors will read it as a greedy market. The trends factor accounts for 10% of the index composition.

Surveys

Strawpoll.com, owned by the sponsor, uses weekly polls to gather votes from people on their views on cryptocurrencies. The views, accounting for 15%, form a part of the index composition. However, the company claims to stop including it as a part of the index.

How to Use the Index to Your Advantage

The index provides speculators and investors with valuable and current market mood and sentiment. To fully utilize the information supplied by the index, you can divide the numerical system of 1 to 100 into 4 areas.

The first is a score of 0 to 25. If the tally falls into the area, it reads an extreme fear around the market, and it may bounce back anytime and can be a buying signal.

A score of 26-50 says the market is still in selling mode, and people are not more fearful than the first one. The crypto prices are still low but not in terrible shape.

When you see the index climb to a score of 52 to 75, you may see positive moods and sentiments coming around in the market. Traders and investors are active, and transaction volumes are increasing. The market views the index as a bullish and greedy mode.

A 76-100 is a signal of extreme greed in a market. People are in FOMO(fear of missing out) status. New heights in prices are occurring in transactions. You may think the market is overheating, and a correction may happen soon.

How Reliable is the Crypto Greed and Fear Index?

The index, an integrated gauge of current market sentiment, reflects fast-moving crypto trends. It is suitable for day traders making profits from short-term speculations and long-term investors for signs of “buy and sell.” However, the fundamental investors may see it as a part of investment strategy only with research like intrinsic value and purposes of uses instead of a single condition for investing.

Though the bitcoin is the primary focus, the index can reflect the mood of the overall market as the bitcoin is still the most significant market taker despite reducing its slices. However, various altcoins like Ethereum, Solana, Binance, and stablecoins like USDT and USDC are gaining traction in the cryptocurrency market. They may have different price correlations with bitcoin. Therefore, altcoin investors should research instead of looking an index only.

Sum Up

The crypto greed and fear index reflects the mood and sentiment of the crypto market. It is suitable for day-traders and long-term investors for price signals. However, the indicator, lacking research information like intrinsic value, is sensitive and may be subject to sudden and rapid changes in a short time. Fundamental investors may include it as a part of investment strategy instead of as a guiding stick.

Key takeaways

  • The index is a reflection of the crypto market mood and sentiment.
  • A numerical score from 0 to 100 ranges from extreme fear to extreme greed.
  • The index suits day traders and long-term investors for pricing signals, but fundamental investors require more research.

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