Do you know that they are two emotions that control the crypto market? They are fear and greed.
When a crypto trader or investor is trading in the crypto market, fear can make them sell their assets, and greed can make them buy more.
The Crypto Fear and Greed Index is an indicator that helps you analyze all the emotions in the market and helps you make decisions based on the data it gathers.
Below, I will show you how the Crypto Fear and Greed Index works and how you can use it to make trading decisions.
Meaning of a Market Indicator?
Market indicators are essential tools crypto traders use to analyze and make trading decisions.
There are many market indicators, including those used for technical, fundamental, and sentimental analysis.
Technical indicators mainly analyze the behavior of the marker based on the volume data of a cryptocurrency and the previous price actions.
Fundamental indicators are focused on unveiling the intrinsic value of a cryptocurrency and are quite the opposite of technical indicators.
Lastly, sentiment indicators use the market investors’ feelings and thoughts to help traders make decisions.
I recommend you don’t use only one indicator when making your trading decisions. Instead, you can combine two or more.
What is Crypto Fear and Greed Index?
As established above, fear and greed are the two common feelings traders feel while trading.
Traders fear and sell their cryptocurrencies their crypto assets. This occurs mostly when the crypto market has a bearish trend.
Also, when there’s greed in the market, traders want to accumulate as many crypto assets as possible to profit. This mainly occurs when there’s a bullish trend in the market.
The Crypto Fear and Greed Index is a tool used by crypto traders to analyze the market and find out if there’s greed or fear in the market.
The number used to analyze the market situation with the Crypto Fear and Greed Index range from 0 to 100. When the index shows a score of 1, traders have extreme fear in the market. When there’s a score of 100, traders have extreme greed to buy crypto assets.
When the score in the Crypto Fear and Greed Index score shows 50, it suggests a neutral situation in the market.
How To Use Crypto Fear and Greed Index
With a number system ranging from 0 to 100, knowledge of the Crypto Fear and Greed Index is quite simple.
Below, I will show you an interpretation of what the numbers represent in the index.
0 to 24
When the Crypto Fear and Greed Index is between 0 and 24, it means there’s extreme fear in the market.
As translated before, a score between this range means many crypto traders are trying to sell off their assets. You identify it with an orange color.
25 to 49
This range means fear; traders are selling off their assets, but not yet on the extreme. You identify it with yellow.
50 to 74
When the Crypto Fear and Greed Index shows a number between 50 to 74, it means there’s greed in the market. Crypto traders are trying to buy more assets, and it is represented with light green.
75 to 100
This is the number range of extreme greed; at this stage, many crypto traders are trying to buy as many cryptocurrencies as possible. You identify it with green.
To provide the score (0 to 100) in the Crypto Fear and Greed Index, certain factors contribute to it. They include:
The volume of the Market and Momentum
The marker momentum and volume contribute about 25% of the total score of a Crypto Fear and Greed Index.
You calculate the market momentum and volume by comparing the current volume and momentum with the market average within 30 to 90 days.
About 15% of the Crypto Fear and Greed Index is calculated using data obtained from social media.
In the case of Bitcoin, higher mentions and hashtags of the cryptocurrency mean more greed in the market than fear.
Contributing about 25% to the total score of the index, you measure volatility by comparing the current cryptocurrency price with the average of 30 to 90 days.
Volatility is a term in Crypto Fear and Greed Index that indicates the uncertainty in the crypto market.
Results from Surveys
Survey results contribute about 15% of the Crypto Fear and Greed Index and are done weekly.
With the weekly results, you can determine if there is fear or greed in the market. A more enthusiastic result means that people are looking forward to buying more cryptocurrencies.
Bitcoin dominance is primarily used for measuring dominance in the Crypto Fear and Greed Index. This is because the most common form of the Crypto Fear and Greed Index is that of Bitcoin.
Bitcoin’s dominance in the market often means that many investors are reallocating money from altcoins and using them to buy Bitcoin.
Trends from Search Engines
The focus here is Google, as the majority of people use Google to search for information. Trends from search engines contribute 10% of the total score in the Crypto Fear and Greed Index.
A positive or negative trend on Google can reveal a lot about the current sentiments of traders in the market.
For instance, “how to sell your Bitcoin” on Google shows fear in the market. However, if people search for “the best way to buy Bitcoin,” there is greed in the market.
Benefits and Downsides of Crypto Fear and Greed Index
The Crypto Fear and Greed Index offers many benefits to crypto traders, just as it has a few downsides. They include:
Benefits of Crypto Fear and Greed Index
Simple to Use
Using the Crypto Fear and Greed Index is simple to use and understand. A simple index diagram can easily translate if there’s fear or greed in the market.
With numbers ranging from 0 to 100, you can easily detect the level of fear or greed among traders. For instance, traders can quickly know that from 0 to 24 means extreme fear in the market.
Helps Make Trading Decisions
With the Crypto Fear and Greed Index, a trader can make smarter decisions based on the sentiments in the market. The tools will help you decide if it is time to sell your cryptocurrencies or time or buy and hold them.
It Helps You Invest Against the Market Trends
You already know that any number below 50 in the Crypto Fear and Greed Index means fear in the market. When there’s fear in the market, this is when most investors sell their crypto assets while waiting for the next bullish trend.
With a Crypto Fear and Greed Index, a brave crypto trader can decide to invest against the market. For instance, during fear levels, when people are selling off their cryptocurrencies, you can decide to buy.
The difference is that when you buy when the price of cryptocurrencies is low, and people are selling off, you may profit greatly in the next bullish market.
Help make Short-term Market Predictions.
The Crypto Fear and Greed Index is a tool used mainly for short-term predictions of the crypto market. In other words, it is not recommended you use this indicator for long-term predictions as it has a record of failure.
But for short-term predictions, it can quickly provide data about the current state of sentiments in the market.
Downsides of Crypto Fear and Greed Index
No Standard Version
We just talked about the most common form of the Crypto Fear and Greed Index. There are other existing versions.
With the development of other versions of this index, there’s no standard concerning the data it provides.
Bad at Long-term Crypto Predictions
Because of the numerous fear and greed cycles in the crypto market within a bullish or bearish market, it can be hard to make long-term predictions with this index.
It is usually updated daily and only serves its purpose reasonably when it comes to short-term market predictions.
Is The Crypto Fear and Greed Index Reliable?
The Crypto Fear and Greed Index will help traders make market decisions to an extent. It has its limitations.
The market indicator is used for short-term market decisions; long-term market decisions can be disastrous.
By updating daily, a Crypto Fear and Greed Index focuses on the market’s current sentiments, not on future sentiments.
Also, the index is more of a technical indicator than a fundamental indicator; using it to make a fundamental analysis is wrong.
The Crypto Fear and Greed Index does not consider the macroeconomic outlook of the market when it is producing its data.
The Crypto Fear and Greed Index is a great tool used by traders and investors to determine the fear and greed level in the market.
It uses a number system ranging from 0 to 100, and each number shows a greater or lesser amount of greed or fear.
The tool is straightforward to use and understand, can help make short-term market decisions, and is easily accessible. However, it doesn’t have a standard version, which can be disastrous for long-term market decisions.