Index of fear and greed in the crypto market. All about the indicator in simple words
In this article, we will analyze a very important indicator of the state of both the financial and cryptocurrency markets – index of fear and greed and answer the questions: why is it important to include it in your research? On what basis is it measured? How to interpret its meaning? And what is “extreme greed” and “absolute fear”? Go!
What is the Fear and Greed Index?
Most decisions are made by financial market participants based on emotions. When people see the market go up, they start to feel FOMO (Forgone Profit Syndrome) and regret not getting into the market before it started to go up. At the same time, investors already in assets want to take even more profit and continue to increase their positions. These processes create a state of “greed” in the market.
The reverse situation – “absolute fear” in the market indicates that cryptocurrencies are undervalued. This can lead to massive selling of currencies and excessive panic. However, fear does not necessarily mean that the market is in a long-term bearish trend. It should be considered as a short-term or medium-term slice of market sentiment.
The Fear and Greed Index analyzes various market trends and indicators to determine if market participants are experiencing greed or fear. A score of 0 indicates extreme fear (Extreme Fear), and 100 indicates extreme greed (Extreme Greed). A score of 50 indicates that the market is relatively neutral.
Conventionally, the index scale can be divided into several categories:
⦁ 0–24: intense fear (orange)
⦁ 25–49: fear (yellow)
⦁ 50–74: greed (light green)
⦁ 75–100: Strong Greed (Green)
What data is used to measure the Fear and Greed Index?
Components of the index of fear and greed:
Volatility (weight in the index – 25%)
In this case, the current volatility and maximum drawdowns of BTC are measured, compared with the average values for the last 30 and 90 days. An unusual spike in volatility is a sign of a scary market.
Momentum/Market Size Ratio (25%)
To determine this indicator, the values of the current volume and market momentum (also for the last 30 and 90 days) are correlated. If high volumes of purchases are recorded daily against the backdrop of positive market conditions, this means that market players are showing excessive greed.
Social networks (15%)
This factor analyzes the number of cryptocurrency-related hashtags on Twitter and the speed of their distribution. Tweets are collected, counted and analyzed: how quickly and actively users reacted to these messages over certain periods of time. High activity leads to an increase in public interest in the coin and, in the opinion of the creators of the index, reflects the greed of market players.
Surveys of professional market participants (15%)
Together with the strawpoll.com platform, the developers of the Greed and Fear Index conduct weekly surveys and find out how people perceive the current situation in the market. 2000-3000 people take part in each survey, and thus an idea of the mood of crypto investors is formed.
BTC dominance (10%)
About this indicator will be a separate article in the following articles. It’s short here. Dominance is the share of the coin in the total market capitalization. In the case of bitcoin: index developers believe that the increase in dominance is caused by the fear of highly speculative investments in altcoins, so bitcoin is becoming an increasingly safe tool for storing capital. Conversely, when the dominance of BTC decreases, it means that people become too greedy, investing in riskier altcoins, dreaming of the opportunity to participate in a new large-scale bull rally.
Google Trends (10%)
To evaluate this metric, Google Trends data is analyzed for various search queries related to Bitcoin and other cryptocurrencies. Particular attention is paid to changing the volume of search queries, as well as recommended and popular queries at the moment.
Where to track the index of fear and greed?
Cryptocurrency Fear and Greed Index can be tracked Here.
The fear index for the stock market is considered differently, but has the same meaning – it reflects the emotional mood of market participants. It can be tracked by this link.
IMPORTANT (Disclaimer): the fear and greed index is just one of his statistical metrics. Its value is not enough for a complete analysis, but as an addition to your research system and for a quick assessment of the current market situation, it is a fairly good tool.
