The Crypto Fear and Greed Index is a market indicator used to measure the thoughts and feelings of crypto traders.
Crypto traders and investors need market indicators to help them study fundamental and technical analysis before investing. It gets even better when you have an indicator that combines technical metrics with market sentiments.
Understanding the crypto fear and greed Index is advantageous when making investment decisions.
Below, you will get a comprehensive explanation of the Crypto Fear and Greed Index and how it works.
What is Crypto Fear and Greed Index?
The Crypto Fear and Greed Index is a tool initially created for the stock market to analyze shares.
But, the market indicator has since been integrated into the crypto market for investors to use.
The Crypto Fear and Greed Index uses different market trends and indicators to determine if the market feels fearful or greedy. The index uses a number system that ranges from 1 to 100, with 1 indicating a high level of fear and 100 indicating a high level of greed.
Fear means that people are selling off their crypto assets, and greed means people are buying. When the indicator shows 50, the crypto market is just neutral.
Few crypto investors view a fearful market as the best time to buy assets since it indicates a bearish trend. When greed dominates the market, this is mostly the time some investors would prefer to sell and wait for the next bearish trend.
When there’s an increasing level of greed in the market (bullish trend), there are chances that the price of cryptocurrencies may quickly go down.
How Does Fear and Greed Index Work?
The explanation behind how the Crypto Fear and Greed Index work is quite simple; it uses numbers.
The numbers used range from 1 to 100. Its classification is into four.
- 0-24: Extreme fear (represented with orange color).
- 25-49: Fear (represented with an Amber-yellow color).
- 50-74: Greed (represented with a light green color).
- 75-100: Extreme Greed (represented with green color).
Many factors come into place before the provision of the metrics for the index. We will discuss the factors that create the Crypto Fear and Greed Index.
Volatility contributes about 25% of the factors that create a Crypto Fear and Greed Index.
The Fear and Greed Index uses volatility to signify uncertainty in the crypto market. A comparison of the current volatility against the average volatility between 30 to 90 days takes place.
If a cryptocurrency has higher volatility is represented as a fearful market, while one with lower volatility is placed on the greed level.
Search Engine Trends
Google trends is the primary search engine considered in the Crypto Fear and Greed Index.
Trends contribute 10% of the total index value, providing a better insight into the sentiments going on in the market.
Assuming people are now searching for “is crypto a scam” on Google, there’s fear in the market. But if people search for “how to buy crypto,” it means more greed in the market.
Market Volume and Momentum
The momentum and value of the market contribute to about 25% of the Crypto Fear and Greed Index.
The current volume and momentum of the market are compared against the average volume and momentum of 30 to 90 days.
Cryptocurrencies with higher volume and momentum in the market are placed on negative metrics.
Social media also contributes about 15% of the Crypto Fear and Greed Index value.
The index gathers data on mentions and hashtags of a particular cryptocurrency and then compares it against past averages.
In comparison, if the crypto trends and mentions on social media are higher than average, it is seen as a better market involvement. Also, it contributes to an increase in the final index output.
Surveys represent about 15% of the total Crypto Fear and Greed Index value.
The Fear and Greed Index conducts a poll and survey about cryptocurrency and the data process.
Mainly two to three thousand people participate in the weekly survey, and the outcome provides hints of fear or greed in the market.
A more enthusiastic survey means market greed is increasing, while a depressing survey indicates fear.
Dominance represents about 10% of the Crypto Fear and Greed Index value.
Talking of dominance, Bitcoin is the primary cryptocurrency whose dominance is measured.
The higher the dominance of Bitcoin, the more fear increases in the market. The lower the dominance, the lower the fear in the market.
When To Use the Fear and Greed Index
Now you know how the Crypto Fear and Greed Index works. The next step is to learn when and how to use the index.
Not all occasions are the index used, and your ability to detect this is vital.
Below you will learn how and when to use the Crypto Fear and Greed Index.
Technical or Fundamental Trader
The Crypto Fear and Greed Index is a technical and not a fundamental indicator.
When making its analysis, the index does not consider the fundamental analysis of a cryptocurrency; technical analysis is considered.
Despite being a technical indicator, it is recommended you don’t entirely depend on the Fear and Greed Index for your technical analysis.
Long or Short-Term Trader
The Crypto Fear and Greed Index is not meant for long-term analysis but for traders who carry out regular trades.
The reason is that within a bull or bear market, fear and greed cycles occur many times.
Keeping that in mind, it would be hard to make an accurate long-term prediction of the market using a Crypto Fear and Greed Index.
Is the Crypto Fear and Greed Index Reliable?
To a reasonable extent, the Crypto Fear and Greed Index helps traders to have a better understanding of the sentiments in the market.
It is even better if you are using it for a short-term analysis of emotions in the crypto market.
However, the tool has limitations starting from being a technical indicator and not fundamental. This means you would need another indicator or tool you want to carry out fundamental analysis.
Also, the indicator makes short-term analyses and cannot be used to make long-term market predictions.
Even as a technical indicator, crypto professionals and experts don’t recommend using one indicator for analysis.
Pros and Cons of Crypto Fear and Greed Index
Each indicator has its benefits, and it also has its downsides. We will discuss the benefits and downsides of the Fear and Greed Index.
Pros of Crypto Fear and Greed Index
Great for Short-term Crypto Predictions
The Crypto Fear and Greed Index is an excellent option for you looking forward to making a short-term technical analysis.
It analyzes the current emotions experienced in the market and helps traders make buying and selling decisions.
Can Confirm Reversal Signals
When combined with other forms of technical indicators, Crypto Fear and Greed Index can confirm reversal signals.
A reversal signal means a change in the market’s direction, from a bullish market to a bearish market and vice versa.
Since it is primarily for short-term predictions of the emotions in the crypto market, the Crypto Fear and Greed Index is updated regularly.
This greatly benefits many crypto traders as they can analyze the market daily.
Easy to Understand
It is straightforward to use and only uses numbers to show users if they are supposed to buy or not.
The numbers on a Crypto Fear and Greed Index range from 1 to 100, and an easy explanation will help you know when to sell or buy a cryptocurrency.
The Fear and Greed Index is accessible to almost everybody in the crypto space. Sometimes, you can even get Twitter updates on the Bitcoin fear and greed index.
Some platforms offer users free Fear and Greed Index services without charging a dime. Despite being free, ensure you research and read reviews of a Crypto Fear and Greed Index indicator before using it.
Cons of Crypto Fear and Greed Index
Not Great for Long-term Predictions
Because many cycles of greed and fear occur within a bear or bull market, using a Crypto Fear and Greed Index isn’t reliable for long-term predictions.
The tool has a history of making wrong long-term predictions of cryptocurrencies.
Not Good For Fundamental Analysis
The Crypto Fear and Greed Index is classified under technical indicators and not a fundamental indicator.
So, don’t make the mistake of trying to make a fundamental analysis using a Fear and Greed Index.
The Crypto Fear and Greed Index is a technical indicator that uses numbers ranging from 1 to 100 to indicate the level of fear or greed in the market.
This market indicator is mainly for those who perform regular trades and not for long-term investors.
While using the Fear and Greed Index, you should not depend entirely on the tool to make your trading decisions.