The crypto market's volatility is a major attraction for some traders, but it can also be challenging. Fear and greed are two of the biggest emotions that affect a trader's ability to make rational decisions.
The Crypto Fear and Greed Index was developed to measure these emotions as they relate to the market. The index uses several factors to determine the current sentiment of the market, from social media mentions to volatility.
This guide will look at how the index works, what it measures, and how you can use it to inform your investment decisions.
What is the Crypto Fear and Greed Index?
Crypto Fear and Greed index (Cfgi) is an indicator that helps track the current states of FUD (Fear, Uncertainty, and Doubt) in the cryptocurrency markets. It measures crypto volatility, social media sentiment, transaction volume, number of transactions per block, exchange volume, Google Trends, etc.
Crypto Fear and Greed is a result is a number between 1 and 100 that helps you see if the market is too greedy (high) or too fearful (low).
Historical data shows that during fear, Bitcoin prices tend to rise. When people get greedy and start buying Bitcoin for more than it's worth, prices fall. The Crypto Fear and Greed Index can help you gauge whether it is a good time to buy or sell.
A quick look at Crypto Fear and Greed Index historical data
Historically, the Fear and Greed Index moves between 0 and 100. Zero means extreme fear, and 100 means extreme greed. The index shows that investors tend to get greedy during a bull market and forget about risk management. This leads to euphoria and, at some point, to a crash. However, during a bear market, panic sets in, and investors are too afraid to hold on to their positions. This leads to capitulation and a crash as well.
Within this range, there are five different states of fear or greed:
- Extreme Fear: Fearful traders are selling their positions. The sentiment is very negative. The market is due for a rally soon.
- Fear: Investors are selling their positions because they expect a further fall in prices. They do not want to miss out on any further downside potential.
- Neutral: Traders lack motivation as they do not see any real opportunities yet. There is no clear direction, and new market participants are not entering the space.
- Greed: The overall sentiment is very positive. This often leads to a further price increase because new investors buy into the asset class, causing prices to rise further.
- Extreme Fear: Panic is spreading, and most investors are selling their positions. This could indicate a reversal or at least a decent correction, as the market cannot get any more negative.
- Extreme Greed: Everyone wants to be exposed to this market, and there seems to be no end to rising prices. A short-term peak, which can lead to a decent correction, might be around the corner.
How to Read the Crypto Fear and Greed Index
The Crypto Fear and Greed index comprises different indicators such as volatility, market momentum / volume, social media trend, surveys, etc. The data from these indicators are compiled and given a 0 to 100. Zero is a highly fearful state, and 100 is an extremely greedy state.
It helps traders decide when to buy or sell their bitcoin. So, if the fear index is in the lower range (below 30), traders should start buying their bitcoin because the market is deemed to be undervalued, whereas if the greed index is in the higher range (above 70), then it's time for traders to sell their coins. After all, they are overvalued.
Which data points make up the Crypto Fear and Greed Index?
Crypto Fear & Greed Index uses the following data points to calculate the index:
- Volatility over the past 30 days. Volatility (25%)
The volatility is calculated by looking at the daily price movements in percentage terms.
- Market Momentum / Volume (25%)
How fast has Bitcoin price been going up or down over the past 30 days? The quicker it goes down, the more fearful investors become. Momentum is calculated as a 7-day moving volume and price change average on all exchanges.
- Social Media (15%)
The number of posts about Bitcoin on Twitter. A high number indicates that people are talking about it, which could signify fear or greed depending on other factors.
- Surveys (15%)
Surveys are performed among different traders and investors, asking them if they're bullish or bearish on Bitcoin in the short term. Results are shown as net percentage bullish minus net percentage bearish.
- Google Trends (10%)
Google Trends shows search interest relative to the highest point on the chart for a given region and time. A trend value of 100 is the peak popularity for the term. While a value of 50 means that the term is half popular. Likewise, a score of 0 shows the term was less than 1% as popular as the peak.
- Dominance (10%)
Volume weighted dominance index of top cryptocurrencies vs. Bitcoin. Bitcoin is the dominant cryptocurrency in the market, so if Bitcoin is rising, more than likely, the crypto market is rising with it.
As Bitcoin increases in value, investors tend to move their holdings into other cryptocurrencies and altcoins. When this happens, Bitcoin dominance decreases as its share of the overall market decreases. A decrease in dominance is often a sign of market recovery and bullish sentiment.
Why should I care about the Crypto Fear and Greed Index?
It is easy to buy crypto in the current market environment. The blockchains work just fine, and the exchanges are still standing. But do you want to buy it now? Are we in a bubble, or is this the start of another bull market?
The Crypto Fear and Greed Index tries to measure the level of fear or greed in the market by analyzing data from different sources. It shows how people feel about the market. When greed is excessive, this usually means that people are buying without thinking too much about it. Sometimes, it may be an indication that a bubble is forming.
When fear is high, this usually means that people are too pessimistic and they are selling their crypto assets quickly.
The Crypto Fear and Greed Index updates daily at midnight UTC.
What can I use this index for?
This index aims to help get you into positions that have the potential for huge gains at relatively low risk. You can think of it as a measure of leverage: When the index is high, leverage goes up. When the index is low, leverage goes down.
There are two ways to use this:
Long-Term Investing: In general, when the Fear and Greed Index is high (above 75), you want to be invested in stocks and other risky assets. When it's low (below 25), you want to be invested in bonds and other safe assets.
Speculative Trading: If you want to make money trading cryptocurrencies like bitcoin (BTC), ether (ETH), ripple (XRP), or litecoin (LTC), you can use this index for your timing strategy. You buy crypto when the index hits extreme Fear levels (below 20) and sell when it hits Greed levels (above 60). For example: If the index hits 30, it's a good time to invest in Bitcoin.
Where to find the Crypto Fear and Greed Index?
You can find the Crypto Fear & Greed Index on this website.
The index is based on the data from several exchanges and weighted by volume to give a good overview of the general feeling in the market. The index value is between 0 (extreme fear) and 100 (extreme greed). The index is updated once a day and reflects the current mood of the crypto market.
Here are three things you should keep in mind when using the fear and greed index for buying cryptocurrencies:
- 1. It's not perfect. The Fear and Greed Index is a great tool, but it's far from perfect. In any market, there are unforeseen factors that can influence volatility. For example, in 2018, Facebook announced plans to ban cryptocurrency advertisements; this caused many investors to sell their coins in response. There was no way to anticipate this event, but it could have been spotted by monitoring investors' sentiment on social media sites like Reddit or Twitter.
- 2. It's best used as part of a larger strategy. The Fear and Greed Index has its merits as a stand-alone tool. But it performs best when used in conjunction with other methods, such as technical analysis or fundamental analysis.
- Technical analysis involves evaluating price charts to identify trends and patterns that can provide insight into future price movements. Fundamental analysis involves assessing different aspects of a cryptocurrency - such as its team members or code base - to determine its intrinsic value and potential for growth.
- 3. The Fear and Greed Index only monitors the top 10 cryptocurrencies by market cap , falling short of monitoring any asset outside this group. This means that assets with smaller market caps will likely not be included in the Fear and Greed Index calculations. However, investors could use these assets' price movements to gauge how much fear or greed is present in the cryptocurrency market since these assets tend to mimic bitcoin's price movement.
- 4. The Fear and Greed Index may not always reflect accurate information about traders' sentiments due to inconsistencies in its data sources. If many investors grow fearful or greedy at the same time, the index may take some time to reflect this change. This can cause you to lose money if you follow the advice of the index.
- 5. The Fear and Greed Index does not consider market-moving news events that can swing investor sentiments towards fear or greed. For example, if a government announces stricter regulations on cryptocurrency trading, investors might grow fearful. This could lead them to sell their cryptocurrencies, causing prices to drop.
The CAGI is a helpful tool that allows users to keep up-to-date with trending topics in crypto. Since there are many different cryptocurrencies, monitoring the market can be a full-time job. The tool provides an aggregate look into the current state of the crypto world, and it can help you be proactive about your crypto investments if you see anger or fear taking over.