What is the Crypto Fear and Greed Index?
Ramon Delfin
For many, the price of cryptocurrencies is irrelevant, as its success isn’t determined by its value but by its impact on the lives of people around the world. However, for traders, cryptocurrencies can be seen as a great investment. The trick is knowing what to do during times when uncertainty is all around. Whether prices are going up or down, volatility can make it a little challenging for newcomers to make informed decisions.
Thankfully, there are now tools that can help you make decisions, one of these being the crypto fear and greed index.
The basics of the crypto fear and greed index
The crypto fear and greed index is a scale that tips towards the current sentiment of people towards the cryptocurrency market. Highs and lows in the value of an asset can be described as the effects of an increase in either fear or greed in the market. An increase in greed would mean higher demand, further increasing Bitcoin prices. Alternatively, an increase in fear would show itself as a decrease in demand and value, making this potentially the most opportune time to buy Bitcoin.
Source: https://alternative.me/
Reading the crypto fear and greed index is simple. If the scale tips to 80 or higher (Extreme Greed), it means that the attitude towards crypto is positive and the market is seeing a lot of greedy purchases, making this the perfect time to sell. Fear increases as the number drops, approaching zero. Times of extreme fear is seen by many as the ideal time to buy BTC, thanks to the low demand and low prices accompanying these periods.
Source: https://alternative.me/
What’s the formula?
Calculating the crypto fear and greed index involves factoring in surveys, social media content, and trends to come up with a temperature reading for the market. Each component will be weighted appropriately, allowing for a more accurate description of the current situation.
Let’s take a look at each of these factors:
Volatility (25%)
This measures the price changes of cryptocurrencies over time, taken as averages over 30 and 90 days. These averages are used to give users a detailed look at the current volatility of the market, as well as its maximum drawdowns and behavior with regard to the average values. An increase in volatility is associated with increased fear in the cryptocurrency market.
Market volume (25%)
Similarly, the 30 and 90-day averages will be used here to measure the momentum of the market. Here, market momentum is combined with market volume to describe how bullish or greedy the market might be at the time. An increase in value here would describe an increase in bullish market volatility.
Social media (15%)
Mostly making use of Twitter posts and supported by data from forum sites like Reddit, this section measures the number of posts and hashtags surrounding Bitcoin and other cryptocurrencies. Post engagement is also considered here, as this shows how “quickly” the community is digesting and disseminating all this information. Increased posting and engagement would describe an increase in market greed.
Surveys (15%)
Weekly polls help analysts observe and understand the market. This way, the first-hand experience of traders is combined with their insights to give analysts an accurate picture of how the community sees the market. Accuracy, of course, would be improved with more respondents to the survey.
Dominance (10%)
The dominance of a coin, in our case Bitcoin, is measured by its market cap as compared to those of other coins. Here, we have to consider how Bitcoin is considered a safe investment in the community.
Analyzing this section is two-fold; an increase in Bitcoin dominance might describe a fearful market since there’s less money circulating in alt-coins. Alternatively, a decrease in dominance might show a greedy market, since people are willing to risk more in alt-coins.
Trends (10%)
Of course, trends would have a role to play in this index. Google Trends is a great tool for this, as it shows search volume on the queries involving Bitcoin or other cryptocurrencies. A little specificity is required here by refining your search term into queries like, “Bitcoin price increase,” “Ethereum price predictions,” and the like. You can judge crypto fear and greed based on the increases in the appropriate search term.
Examples of extreme fear and greed in crypto
Now that we’ve broken down what makes up the index, let’s take a look at some real-world examples of how extreme fear or greed can manifest itself in the market. Here are a few cases where we see a drastic change in the value of BTC accompanied by events that may have caused a surge of fear or greed.
Extreme fear
August 22, 2019 – 5/100
Bitcoin Price: $10,127.53 USD
Average BTC price during this period: $10,000 USD
After steadily increasing in value over a few months, BTC breached the $12,000 USD mark amid trade worries caused by the 10% tariff on Chinese goods in the U.S. This did not last, however, as BTC found its value plunging soon after.
March 28, 2020 – 8/100
Bitcoin Price: $6,208.81 USD
Index range from March 10-April 17 – 9-16/100
Average BTC price during this period: $6,000-$7,000 USD
The global pandemic in 2020 had a tremendous impact on BTC’s value. BTC would eventually go below $4,000 USD at that time, losing half of its value in just two days. The subsequent oil plunge would scare a lot of investors into de-risking, further worsening the situation.
Jun 22, 2021 – 10/100
BTC Price: $31,655.20 USD
Index range from May 22-Jul 18: 10-19/100
Following a massive crash that started on May 12, China’s government would decide to ban Bitcoin in their country—mining, holding, and trading would all become illegal. This would scare the international BTC market into selling what they had, causing the BTC value to plummet from an all-time high of $63, 569.81 USD on April 14 to as low as $29,789.94 USD on Jul 21
Elon musk would also announce that Tesla would no longer be accepting Bitcoin, a turnaround from their initial support of the currency. This would further compound the issue, lowering BTC’s value even more.
Jan 8, 2022 – 10/100
BTC Price: $41,534.35 USD
Preceded by a crash from $50,792.04 USD on Dec 7, early this year BTC would see a brief drop due to the fear of a “crypto winter”. This fear pushed a lot of investors into removing their riskier investments in favor of stability. This was followed by a low of $35,071.80 USD on Jan 23.
Extreme greed
July 9, 2019 – 84/100
BTC Price: $12,304.35 USD
Bitcoin would find itself increasing in popularity and adoption at this time with the currency breaching all-time highs multiple times over the span of a few months, reaching a new all-time high since 2017. This extreme greed would cause BTC to reach its then all-time high of $12,000 USD.
Aug 11, 2020 – 84/100
BTC Price: $11,391.01 USD
Index range from July 31-September 3 – 75-84/100
: $10,000-$11,000 USD
Preceding the bull run from October 2020 to Jan 2021, fiat currencies weakened and Bitcoin entered the mainstream market. This would start its rapid rise, seeing a run from October to January. The market’s greed would make it difficult for newcomers to invest as BTC value climbed higher.
December 8, 2020 – 95/100
BTC Price: $18,549.09 USD
In the middle of 2020’s bull run, a clamoring for institutional investors would help BTC find itself the focus of market greed once more. Coming from August’s $11,000 USD, it would find itself past $18,000 USD by the end of the year. Increases in purchasing power and inflation would be huge factors in this increase in greed.
Dec 31, 2020 – 95/100
BTC Price: $28,890.12 USD
Index range from Nov 17-Jan 9: 86-95/100
Average BTC price during this period: $16,000-$40,000 USD
The first of many all-time highs was hit on Jan 10, 2021, at $40,256.35 USD
Feb 9, 2021 – 95/100
BTC Price: $46,527 USD
This coincides with the beginning of another bull run that started on Feb 7, 2021, in anticipation of the impending Bitcoin halving that happened after two months.
Feb 14, 2021 – 95/100
BTC Price: $47,215.52 USD
Index range from Feb 7-Feb 22: 86-95/100
Price range from Feb 7-Feb 22: $39,000-$56,000 USD
More and more people would begin their BTC investing and trading at this time. The greed seen in the market at this time would help boost BTC past $50,000 USD at one point, finding stability a little past $47,000 USD.
Oct 20, 2021 – 84/100
BTC Price: $64,276.54 USD
The increasing popularity of NFTs would drive people to learn more about the crypto space, diverting attention towards Bitcoin, the first of its kind. An all-time high was reached the next day at $66,008.47 USD. The BTC all time high was reached later on Nov 9, 2021 at $67,553.95 USD
How to invest in crypto with fear and greed in mind
Imagine this: you go online one day and see that a lot of your friends on social media are buying Bitcoin at an alarming rate. You, as a result, feel the need to buy Bitcoin as well. After all, you wouldn’t want to miss out, would you? Next thing you know, the market then corrects itself and the demand for Bitcoin dropped along with its value.
This is just a basic example of how purchases can be emotionally charged — and you might find that impulsive trades aren’t the best option for you.
Trading Bitcoin using the fear and greed index is a simple matter of knowing what options you have when facing certain conditions. When greed is high, prices will probably drop soon, so selling your BTC might be the best option. The opposite applies, with high fear indicating a good time to buy.
What can we learn from it?
The most basic lesson we can learn from this is how much public sentiment can potentially affect the value of cryptocurrencies. It’s the same lesson we’ve learned through the different economic crises we’ve had over the past few decades; fear might force people to stop spending, causing stock values to drop, while extreme greed can potentially lead to economic bubbles.
The crypto fear and greed index is a helpful tool to understand the sentiments of the public, helping you avoid making trades based on pure emotion. In a market that can confuse even the most experienced trader, nothing beats good information.
*The content of this article is for informational purposes only; you should not construe any such information or other material as legal, tax, investment, financial, or other advice. You should carry out your own independent verification of facts and data and may want to seek professional advice before making any decisions.
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Posted Jul 19, 2023
Long-form semi-technical piece talking about one of the tools blockchain investors can use to influence their trades.
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