It’s 2022 and despite its ups and downs, cryptocurrencies are still a strong long-term investment opportunity. Soaring market caps, the entry of new and credible players, and real-world possibilities linked to elementary blockchain technology are the major growth drivers.
Meanwhile, crypto day traders are also leveraging the ups and downs in the market to make money. Both investors and traders leverage an index called crypto fear and greed, which are the two key emotions influencing investors’ decision-making.
The crypto fear and greed index works similarly to the stock fear and greed index. It was started by Alternative.me, an investment analysis firm, in 2018 to measure crypto market sentiments. The firm collects data on investors’ emotions from different sources and tells investors if the market is bullish or bearish.
How Does the Crypto Fear and Greed Index Work?
The index generates a number between 1 and 100 based on the data it collects. If the score ranges from 0-24, it means the market is in “extreme fear.” And that the investors are selling off their coins as fast as possible.
A score between 25-49 indicates that a market is in ‘fear’, which means that the investors’ interest is predominantly muted. For investors with a high-risk appetite, this is a good buying opportunity.
Note: A score of 50 on a crypto fear and greed index means it is a neutral market.
A score of 51 to 74 suggests that investors are getting greedy and are buying cryptocurrencies.
If the market score ranges between 75 and 100, it shows ‘extreme greed’ and it means that the market is in a bubble and could burst soon. When the market gets too greedy, it is the right time to sell and exit investments.
The crypto market is a risky space, and the same risky nature makes investors buy and sell haphazardly. Also, the fear of missing out (FOMO) makes them greedy and drives them to invest.
The crypto fear and greed index provides an unbiased and factual view of the market and stops investors from making irrational investing decisions. It also shows that if the fear and greed index is low, the market will gain momentum soon and vice versa.
How is This Index Calculated?
There are several factors that are used and weighted to calculate the crypto fear and greed index. Let’s look at all of them:
- Volatility: If the volatility in the market increases, it means that the market is fearful or in a panic.
- Market Momentum/Volume: This indicator compares the current momentum of the market to the current volume. For instance, if the volume is greater than the long-term momentum, it indicates that the market is getting very greedy.
- Social Media: Here, a Twitter sentiment analysis tool is used to pinpoint an oddly high interaction rate to determine market greed behavior.
- Bitcoin Dominance: When Bitcoin is dominant in the market, the market is in fear mode trying to move to a safer digital asset. When Bitcoin’s dominance starts to fall, it means the market’s greed is escalating and they are investing in more risky altcoins.
- Trends: This indicator uses Google Trends to find out the number of people looking for Bitcoin information. When search terms like “Bitcoin price manipulation” are searched more, it is a sign of a bearish market. The search for “Bitcoin price prediction” means it is going to be a bullish market.
- Surveys: The surveys among the crypto community also play a major role in determining whether the market is fearful or greedy.
The Benefits of Using a Fear and Greed Index
According to experts, greed can make investors keep their self-control, and common sense aside, and invest. While there is no research that proves greed’s biochemistry, humans are powerfully motivated by fear and greed. However, it still has its benefits. Some of them are:
- Crypto investors don’t have to spend a lot of time on research and can just invest based on the results of the index.
- With this index, traders and investors can better understand market sentiments. They can take steps to be aware of both extremes. Also, they can make smart buy and sell decisions.
- Investors with a high-risk appetite can use the crypto fear and greed index to invest against the market. They invest when the market is volatile and other investors don’t want to invest.
How To Use the Fear and Greed Index As A Tool?
We’ve previously explained the four quadrants of this index:
- 0-24 indicates extreme fear
- 25-49 indicates a fearful crypto market
- 50-74 shows that greed is slowly taking over the market
- 75-100 shows that the market is extremely greedy
Now, we’ll see how you can use it to your advantage to understand where the opportunities lie.
When the score is 0-24, the market is extremely fearful. This is a great opportunity to invest at a low price. When the market is between 25-49, the market is fearful. The prices are still low and investors can still invest.
If the index score is 50-74, this means that the market is getting greedy. During this time, the market is bullish and you can sell or wait for the market to move higher. This is a risky decision as the market can go down.
Within 75-100, the market is extremely greedy and it means that a correction is going to take place soon. Here the opportunity is ripe for selling your investments.
The Financial Takeaway
Crypto investments are risky. As such, using an index can be very helpful in making smart decisions. Usually, investors spend hours performing the technical analysis of the market and finding opportunities to invest. With the fear and greed index, hours’ worth of research isn’t necessary. Investors can either buy or sell based on the score of the index.