The Crypto Fear & Greed Index

Imagine being able to tell how the crypto market feels based on emotions. Well, we have the Fear & Greed Index.?

Wall Street says that financial markets move based on two emotions: fear and greed. Even legendary economist John Keynes regarded fear and greed as the ‘animal spirits’ of economies and markets.

Thankfully, we can use a tool to measure these two emotions in the crypto market: the Crypto Fear & Greed (FGI) Index.

Let’s explore how this index works and how it can be significant for crypto traders or investors.

About The Crypto Fear & Greed Index

The FGI in crypto measures fear and greed on a scale of 0 to 100. Inspired by the CNNMoney Fear & Greed Index, the indicator is based on the idea that fear drives prices down while greed drives prices up.

When there is fear, prices keep rising, leading to FOMO (fear of missing out). This signals that investors are worried as more people invest in digital currencies, which could lead to buying opportunities.

When there is greed, the people who bought when prices were low begin to take the profits off the table, leading to a market correction - of course, this might suggest selling opportunities.?

Readings from 0 to 50 indicate fear (with 0-25 being seen as extreme fear), while those from 50 to 100 indicate greed (with 75-100 being seen as extreme fear). In some instances, an exact result of 50 may be taken as a neutral sign.

Below is an example of the FGI on the site Alternative.me.

Furthermore, the website shows a graph of the FGI values over the last week, month, three months, and year (as far back as January 2018). Analysts can match this data with the price movements on the charts.

The example below is the readings over the past 30 days.

Generally, there is a positive correlation between crypto prices and the Fear & Greed Index.

How the Crypto Fear & Greed Index is calculated

The FGI primarily uses Bitcoin-related data, as BTC is the most influential digital currency. So, it’s often an excellent representation of the crypto market as a whole.?

While there may be slight differences between provider to provider, the FGI is calculated according to the following factors (in order of importance)

1. Volatility: The FGI considers present volatility and drawdowns and compares it with averages over a certain period (like 1-3 months). It pays particular attention to any unusual rises (suggesting fear) or declines (suggesting greed).
2. Volume: The FGI will examine Bitcoin’s current trading volume and momentum and correlate it with 30—and 90-day average values. An uptick in volume may indicate greed (the opposite is true for fear).
3. Social media: Here, the index observes the interaction rates of Twitter/X hashtags relating to Bitcoin. If more people are tweeting about the coin than before, the site believes this corresponds to greedy behaviour and vice versa for fear.
4. Bitcoin dominance: This relates to Bitcoin's market cap share. A shrinkage in Bitcoin dominance means investors seek more altcoins, resulting in greed. Conversely, investors become fearful when they buy more into BTC because of its status as a so-called safe haven.

5. Google Trends: Here, the index uses specific Bitcoin search queries, particularly the increasing and decreasing volumes, which can be insightful for market sentiment.?

How is the Crypto Fear & Greed Index useful?

Scientific research has proven time and time again how humans react with fear and greed regarding financial decisions.

These are potent motives that easily override any common sense and discipline. The FGI can be used in several ways. This tool can act as the first reference point that you can use to correlate with other analyses.

For example, if the index shows ‘extreme fear,’ one can confidently wait for their other analysis to present a buying signal.?

Similarly, if you were already in a position and noticed the index moving towards the greed side, this could be a good time to sell. So, you can constantly use the FGI to provide an overall bias on where to enter and exit the market.

Another technique, although the riskiest, is using a contrarian approach to market sentiment. The classic “Be fearful when others are greedy, and greedy when others are fearful..” quote by Warren Buffett comes to mind.

In other words, contrarians believe in doing the opposite where you sell when others are buying or buy when others are selling.

Final thoughts

The FGI is a valuable tool for understanding the current sentiment in crypto. It’s often an accurate reflection of whether the market is about to be bullish or bearish. As with anything, it’s not only the indicator responsible for price movements.

We always advise treading with caution at DoshFX and only invest in projects you have researched. Otherwise, we continue to exist as a safe, regulated crypto exchange for South Africans!

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