Lily R.
Lily R.
Oct 26, 2022

What Is The Fear And Greed Index?

tl;drThe crypto fear and Greed Index is a chart that measures which emotion dominates in the crypto market, i.e., fear or greed. The chart helps traders plan their strategies accordingly, and multiple well-known investors use the chart to analyse and predict the market. Keep reading to learn how to use the index to make better investment decisions.
What Is The Fear And Greed Index?
What Is The Fear And Greed Index?
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What Is the Crypto Fear and Greed Index?

The Fear and Greed Index was created by CNNMoney, CNN’s financial news website, to measure the two most influential emotions in investors’ decision-making: fear and greed. It's called an index since it takes the data from multiple resources and combines them into a single, easy-to-read chart.

How Does The Fear and Greed Index Work?

The Fear and Greed Index generates a number ranging from 1 to 100, with number 1 indicating that the market is experiencing extreme fear and number 100 representing the investors' over-enthusiasm or “greed”.

While in extreme fear, most people tend to sell their assets, while in greed, people tend to buy more. This data can help professional investors to plan their investment activities and strategies, and some can even predict the price action of an asset.

Calculation of the Fear and Greed Index

Even though the Fear and Greed Index in the stock market and crypto represent the same thing, their calculations to achieve the resulting number are slightly different since the crypto market tends to be more volatile. Here, we will analyse both calculations.

In Stock Market

CNNMoney uses seven factors to calculate the stock market Fear and Greed Index. These seven factors are

  • Stock Price Momentum
  • Stock Price Strength
  • Stock price breadth
  • Put and Call Options
  • Junk Bond Demand
  • Market Volatility,
  • Safe-Haven Demand

In Crypto

The factors the crypto Fear and Greed Index takes into calculation are a mix of the ones we’ve already seen in the stock market and some others that are unique to the crypto market since cryptocurrencies are more volatile and social by nature.

We will go through each of them and how much impact each factor has in the final calculations:

  • Volatility (25%): Measuring cryptocurrency price changes over 30 to 90 days on average.
  • Market Volume (25%): Measurements of 30 to 90 days on the market momentum and volume.
  • Social Media (15%): Mostly tweets and data from other social media like Reddit
  • Surveys (15%): Weekly polls from traders and analysts
  • Dominance (10%): The market dominance of an asset compared to other assets.
  • Trends (10%): Utilising tools like Google Trends to show search volume on crypto-related queries.

Historical Chart

The year 2022 is infamous for having several months of constant extreme fear. With events like Bitcoin dropping from almost $70k to under $20k, and the fall of Terra and LUNA, many investors chose not to take too many risks and hold onto their assets, resulting in extreme fear in the market. Here’s the visualised Fear and Greed Index of the crypto market over the past year:

Fear and Greed Index of crypto market from Sep 2021 to Sep 2022.
Fear and Greed Index of crypto market from Sep 2021 to Sep 2022.

Examples of Extreme Fear And Greed in Crypto

For this case, we will analyse Bitcoin and review recent examples of when Bitcoin investors felt extremely fearful or greedy. 

Extreme Greed

Date: October 20, 2021

Bitcoin Price: $64,276.54

Fear and Greed Index: 84/100

Back in the day, NFTs became trendy and even turned into memes, attracting many people into the crypto world. Being the king of crypto, Bitcoin gained much new attention and hit its next All-Time High of 66,008 USD the day after, on October 21, 2022.

Extreme Fear

Date: June 22, 2021

Bitcoin Price: 31,655.20 USD

Fear and Greed Index: 19/100 

Following the famous crypto crash in May 2021, the Chinese government announced a ban on anything Bitcoin-related in China. Any interaction with Bitcoin, like mining, holding, and trading, would be considered illegal. Of course, this scared many investors to cash out, which caused BTC to drop from nearly $64k to below $30K instantly!

How Do You Read the Crypto Fear and Greed Index?

Since the Fear and Greed Index provides easy-to-understand information about the dominant feeling in the market, all you have to do is to check a single number! The number that the index shows ranges from 1 to 100, with 1 indicating extreme fear and 100 indicating extreme greed. Any number below 50 can be considered fear dominance, and any number above it can represent the greediness of investors.

What Does Extreme Fear and Greed Tell You?

Extreme Fear and Greed can indicate many things about the market and shed light on unique opportunities. For example, some investors encourage others to buy Bitcoin in times of extreme fear since the price is really low compared to the true value of Bitcoin.

In short, extreme fear means most people are cashing out, and extreme greed means most people are buying in. These two pieces of data can help traders plan their next strategy accordingly.

What Are the Advantages of The Crypto Fear and Greed Index?

The Fear and Greed Index can provide valuable insight into the current state of the market. This data is especially useful in the crypto market. Some of these advantages are

  • Detecting FOMOs (Fear of Missing Out) and FUDs (Fear, Uncertainty, Doubt) instantly
  • Planning trading strategies for the near future
  • Being able to buy assets that were once almost inaccessible to normal crypto users
  • Easy-to-read data
  • Suitable for new traders.

What Are the Disadvantages of The Crypto Fear and Greed Index?

Every investment tool can have its disadvantages if not used properly. Some downsides of the Fear and Greed Index are

  • Data from the index can’t be used for long-term investments
  • It might influence your emotions and cloud your mind
  • The data is too minimal; you’ll need data from other tools to make a proper investment decision.

How to Use the Fear and Greed Index When Trading

The crypto market is well-known for being volatile. This is due to emotional decisions from investors reacting to a FUD or a FOMO. FUDs can cause investors to get fearful and cash out their crypto assets, and FOMOs can make investors greedy when the market has an upward trend.

The main purpose of the Fear and Greed Index is that it acts as a market indicator and informs traders about the market to help them remove emotion from their investment strategies. Here’s how the index data can enhance your trading moves:

  • Extreme greed could mean the investors are over-enthusiastic, and assets are priced higher than their actual value.
  • Extreme fear could mean a fresh buying opportunity is open since most investors are too fearful.

Can You Use the Crypto Fear and Greed Index to Predict the Market?

Yes, the crypto Fear and Greed Index can be used to predict the volatile market of cryptocurrencies in the short term. In the long run, you’ll need more data, and you can’t just rely on a number representing the dominant emotions in the market for only one day.

Extreme fear could indicate the market won’t be seeing any upward trends any time soon, and you can buy crypto since it’s cheap and undervalued during these times. However, once you notice the number on the index is rising, it could indicate the market is recovering, and you can expect a pump in the price of your crypto assets.

How Can I Control My Own Emotions When Investing?

Another thing that the Fear and Greed Index reveals is that the market can behave absurdly at times. Here are some strategies you can use to prevent yourself from going insanely with the tide and control your emotions:

Do The Opposite of What The Index Shows!

Warren Buffett (One of the most successful investors with a net worth of $95 billion as of October 2022) doesn’t have many fans in the crypto world. However, a quote of his is very useful for planning trading strategies:

“Be greedy when others are fearful and fearful when others are greedy.”

Keep this in mind while checking the Fear and Greed Index and whenever you think you’re caught up in all the FUDs and FOMOs.

DCA Strategy Is A Dear Friend of Yours!

Dollar-Cost Averaging (DCA) is an investment strategy involving making small investments in the long term rather than a big investment at once. For example, you can get $25 of BTC every week instead of waiting for your paycheck and spending $100 on Bitcoin every month. DCA is a popular investment strategy in the crypto industry because it is consistent and helps remove emotions from investing.

3. Diversify Your Investments!

Diversifying your investment is a way of managing your emotional response during times of high market volatility. Morgan Stanley, an analyst from investment banking, recommends:

“Develop a strategy to diversify your investments across different asset classes and vehicles to minimise systemic and asset-specific risk.”

What Is Bitcoin Fear And Greed Index?

The Bitcoin Fear and Greed Index shows how over-enthusiastic or scared Bitcoin investors are. By analysing the factors discussed above, the index provides valuable information about whether the general market feels bullish or bearish on Bitcoin.

What Is Shiba Inu Fear and Greed Index?

The Shiba Inu Fear and Greed Index measures multiple parameters to give insight into how investors are feeling about Shiba Inu. The data can be useful to determine if Shiba Inu’s price will pump, dump, or remain relatively stable in the near future.

Summary

Fear and Greed Index provides an easy-to-read chart about the two emotions influencing investors' decisions most: Fear and Greed. The information is valuable and minimal since it only consists of a number that scales from 1 to 100, showing how the market will perform in the short term. 

FAQ

Now that we have learned about the crypto Fear and Greed Index, it’s time to answer some FAQs.

How Do Fear And Greed Index Affect The Decisions Of Investors?

In times of extreme fear or FUD, investors could be influenced to cash out their crypto assets so that they won’t lose more money. Also, during extreme greed, investors may choose to buy more assets since they feel positive and “greedy” over the market’s upward trend.

Where To Find Crypto Fear And Greed Index?

You can follow @BitcoinFear on Twitter to receive constant updates on Bitcoin Fear and Greed on your Twitter feed. You can also check Alternative.me for daily updates on crypto fear and greed in the market. 

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