Cryptocurrency is a highly volatile asset, mostly due to the speculative nature of investments. According to a report by Crypto.com, India alone has over 10 million users, while the number of global crypto investors has reached 106 million in January 2021. “Cryptocurrency market behavior is very emotional. When the market is moving people get greedy which results in FOMO (fear of missing out). Furthermore, people often see (a) irrational response (to) by seeing red numbers. Sell your coins in the U.S.,” says Alternative.me, the company that came up with the Crypto Fear and Greed Index to analyze and quantify sentiments and sentiments from various sources. ,
What is the Fear and Greed Index?
Based on a measure of investor sentiment towards the market, the Crypto Fear and Greed Index indicates whether the market is bullish (high) or bearish (low). ‘Extreme fear’ means investors are very worried, but it can also mean that this is a buying opportunity. When the index indicates that investors are getting too greedy, it means that the market is about to correct the option.
how does it work?
The Crypto Fear and Greed Index scores between 0 and 100. A lower score indicates more fear in the market (the score appears in red), which means more investors are selling, causing the cryptocurrency market to fall. A higher score means that greed is high (scores appear in green) and people are buying. “When investors are getting too greedy, it means the market is due for a correction,” Alternatives.me explains in a blog post.
‘Extreme fear’ is defined as a number between 0 and 24; A score of 25-49 indicates ‘fear’ in the market. A score of 50 suggests a neutral position. A score of 51-74 indicates ‘greed’ and a score of 75 to 100 means ‘extreme greed’.
What is an index made of?
According to alternative.me, the Fear and Greed Index aggregates information based on volatility, volume, social media posts and dominance of coins.
Volatility contributes 25 per cent to the index. Bitcoin’s current volatility and maximum drop is compared with the respective average values for the past 30 days and 90 days. According to alternative.me, an unusual increase in volatility is a sign of a fearful market.
Market volume or momentum also constitutes 25 per cent of the total weightage. Current volume and market momentum are measured, and compared with previous 30- and 90-day averages. If a positive market has high buying volume on a daily basis, the market is considered greedy or too bullish.
Social media posts are a significant contributor to the craze in cryptocurrencies. Social media holds 15 per cent weightage in the index. According to Alternatives.me, this data is estimated by tracking Twitter hashtags and focusing on the speed and volume of social media interactions.
Dominance holds 10 per cent of the weightage of the index. The presence or share of a coin in the market cap of the entire crypto market is dominated by it.
According to Alternatives.me, they also pull and quantify Google Trends data for various bitcoin-related search queries. They specifically track changes in search volume and other currently popular searches.
Is the index reliable?
Fear and Greed Index helps to understand the crypto market situation to some extent. But any decision to invest, hold or withdraw cannot be based solely on the index. Also watch out for things like fundamental analysis and technical analysis, advises Kashif Raza, founder of Bitfinding, an online platform focused on crypto awareness.
“While the index represents current sentiment, it is not an accurate predictor of future market movements. For example, the index showed ‘extreme greed’ (>90) in November 2020, which usually means that investors have to book profits. However, the bitcoin and crypto market continues to post new highs over the next six months,” says Vikram Subburaj, Co-Founder and CEO, Geotas cryptocurrency exchange. Subburaj advises investors to look at other technical metrics in conjunction with the Fear and Greed Index to understand how the market may behave in the near future.
The Crypto Fear and Greed Index as on January 10, 2022 is 23, which shows ‘Extreme Fear’ as per AlternativeMe.