Crypto investing isn’t easy but there are tools out there that can help and one of the most useful is the Fear and Greed Index
For many of us, crypto investing represents the opportunity of a lifetime. Bitcoin alone grew by 87% in 2019 compared to the Nasdaq’s 35%. This figure doesn’t even consider all of the rapidly growing altcoins and DeFi projects we’ve seen in 2020, all of which represent a huge opportunity to both long-term investors and those looking to trade on momentum.
The challenge, as those left holding the bag after the Bitcoin bust in 2018 know, is timing the market. Well, there are some tools that can help with that, and few are as powerful as the Crypto Fear and Greed Index.
What Does Fear And Greed Have to Do With Cryptocurrency?
At their core, all markets are emotional. Seemingly small announcements or set-backs will often cause a rush in buying or selling, which can have an outsized impact. This is true even in mature markets. But it’s doubly true for young, volatile markets like cryptocurrency.
Understanding how emotions impact the market you’re trading in is key for any trader and can give you a significant edge over less well-informed competition.
This is where the Crypto Fear and Greed Index comes in. Essentially, the index is a tool for measuring the crypto market’s status. These kinds of indexes are not unique to cryptocurrency and have been used by CNN Money and others to try to make sense of the traditional stock markets.
The idea is based on the concept that stock market fluctuations, particularly over and under-corrections, are driven by two emotions: fear, and greed.
- Fear: When traders are concerned about the future of the market, for example in the event of adverse crypto regulation or the revelation of a large scam, they tend to sell or consolidate, leading to significant price drops.
- Greed: When traders believe that the market will do well, they become less risk averse and are more likely to purchase tokens that they would avoid in other scenarios. This leads to outsized price increases.
Understanding these concepts, and how they impact the overall market, can give traders a significant advantage.
How the Crypto Fear and Greed Index Is Calculated
Any analysis is only as good as its data. To measure whether the market is leaning towards fear or greed, the index takes data from five key sources:
- Volatility: The current volatility compared to the average values of 30 and 90 days; an unusual rise in volatility tips the scales towards fear.
- Market Volume/Momentum: The current volume/momentum compared to the average values of the last 30 and 90 days; high buying volumes over an extended period tip the scales towards greed.
- Social Media: Twitter sentiment gathers post counts and hashtags for each coin and measures the interaction rate; an unusual spike in interest would indicate a ‘greedy’ market.
- Dominance: Measures the market dominance of Bitcoin; a rising market cap for Bitcoin is indicative of investors consolidating their assets, thus a fearful market.
- Trends: Analyze Google Trends data for Bitcoin-related search queries to understand what people are searching for; a spike in negative or positive search terms will tip the needle in favor of fear or greed.
The important thing to note about this is that all of the data is useful because of a phenomenon known as group mentality. Traders tend to react to movements in the market in ways that mirror herd behavior. This can cause a wave of buying or selling which has an outsized impact on the overall price of BTC and other cryptocurrencies.
How Can Crypto Traders Leverage the Fear And Greed Index?
In order to trade profitably, it’s essential to buy or sell before the rest of the market realizes what is happening. This leads to the somewhat unintuitive practice of buying when the market is fearful (low) and selling when the market becomes too greedy (high).
However, traders can’t rely solely upon the Fear and Greed Index. Instead it should be treated as a sort of market thermometer. If you know that the market is leaning towards greed, you need to look at the news. Is a bubble forming? If it looks like a tipping point is coming, make your move.
Let’s take a look at how that works in practice:
The interesting point in this chart is the very sudden dip around the beginning of September. Up until then, the market had been sitting in the high 70s for over a month.
This chart, demonstrating the price of Bitcoin over the same period, shows a similar trend. While greed was high the price of BTC remained positive and then there was a sudden, rapid correction that the market is slowly beginning to recover from.
An investor looking at the greed index towards the end of August would have noticed that the index was slowly climbing up, along with the price of Bitcoin. This, in combination with news about an overheated DeFi market should have been an indicator that late August was a time to sell assets — or consolidate them into a safer place before the market crashed.
A Valuable Tool in Your Belt
The Fear and Greed index shouldn’t be taken as gospel. But it is a perfect tool for understanding the crypto market at a glance. When combined with good research and a strong understanding of the market’s fundamentals, it can help you decide the time to sell or buy. It should also be noted that the index doesn’t necessarily mean you should buy your sell if you’re planning to hold crypto for a long time rather than trade the