• The Bitcoin Fear and Greed Index is a market sentiment indicator that quantifies the overall sentiment and emotions in the market between 0-100 on the Bitcoin chart.
  • A value of 0 on the chart shows a level of extreme fear in the market while a value of 100 means extreme greed. 50 is somewhat neutral.
  • The Bitcoin fear and greed index is calculated by incorporating these 6 components: Volatility - 25%, Market Momentum/Volume - 25%, Social Media - 15%, Surveys - 15%, Dominance - 10%, Trends - 10%.

Introduction

Fear and Greed Index generally aims to measure the thoughts and sentiments of traders. A successful investor always looks for supportive and reliable data before buying in or selling out. They look at charts, analyse the fundamentals, and tap into the market sentiments before making any decision. While considering every available stat and index isn't humanly possible, analyzing some selected metrics can help in figuring out the overall condition of the cryptocurrency markets.

What is Bitcoin Fear and Greed Index?

Bitcoin dominates the crypto fear and greed indexes since the crypto markets are highly dependent on Bitcoin’s movements. The Bitcoin fear & greed index is bound between the values of 0 and 100 on its reading. Fear (0 to 49) signifies excess supply in the market and undervaluation. Greed (50 to 100) refers to a possible bubble and an overvaluation of altcoins. The ultimate goal is to assist traders in making informed decisions by analyzing the bitcoin market.

Why Measure Fear and Greed Index?

Humans are emotional, and that’s a fact. This can be seen in the crypto market behavior as well. People generally get greedy when the market is rising, resulting in fear of missing out. Also, they often sell their coins if they see any red numbers. The Bitcoin Fear and Greed Index aims to save people from emotionally overreacting. There are two simple assumptions:

  • Extreme fear means that investors are too worried, and that could be a buying opportunity.
  • Extreme greed means that the market is expected to experience a correction towards more neutral levels.

Considering changes in the scale of Bitcoin fear and greed index should be an essential part of trading strategy when deciding to exit or enter the crypto market.

Data Sources

The Bitcoin fear and greed index is calculated with the 6 components below:

  1. Volatility (25 %): Volatility looks at the current value of Bitcoin along with averages from the last 30 and 90 days. An unexpected increase in volatility signals a fearful market.
  2. Market Momentum/Volume (25%): High buying volumes in a positive market on a daily basis is a sign that the market is too bullish or overly greedy.
  3. Social Media (15%): A more than usual interaction rate on Twitter or Reddit shows a rise in public interest in Bitcoin and signifies a greedy market behaviour.
  4. Surveys (15%): Various polls are conducted on different platforms that ask users about their feelings towards the current market.
  5. Dominance (10%): A rise in Bitcoin dominance means a fear and so, reduction of too speculative crypto investments, since Bitcoin is assumed to be the safe haven for crypto enthusiasts. On the contrary, shrinking Bitcoin dominance shows that people are getting greedier by investing in riskier coins.
  6. Trends (10%): Google search trends for Bitcoin-related queries provide insights into market sentiment. For instance, a high number of searches related to "Bitcoin Scam" indicates a feeling of fear in the market.

Drawbacks of the Bitcoin Fear and Greed Index

The Bitcoin fear and greed index is not suitable for long-term analysis of crypto market trends, and even with short-term ones, it is not always accurate. It is not possible to predict how long the market can stay in either fear or greed cycle. Hence, investors will need to analyse other market aspects, do their own research and practice before sticking to any strategy.

Closing thoughts

The Crypto fear and greed index is a straightforward and easy way to summarize market sentiments. It has its own fair share of criticisms, but at the end of the day, having an index is better than having no index at all. If an investor wants to include it in their analysis, it would be wise to complement it with other metrics to get a more balanced and less risky view.