Know More About Fear and Greed index
Has it ever occurred to you that even though you have made a solid investment plan, it can be ruined in just a few seconds by the market participant’s panic or greed?
Various stimuli can trigger these sentiments in the market, for example, the “Fear of missing out” or “FOMO,” as public and private institutions and corporations turn their attention to Bitcoin.
It may cause most investors to fear that the price will rise higher than its current level, and so they flood the market with their buy orders, causing the price to rise in the end.
The fear of getting stuck buying at such a high price also causes a shift in investors’ sentiment when a group of investors starts to panic and sell their assets, along with the negative news that came out during the price decline.
A diagram that demonstrates investors’ sentiment when experiencing a market crisis. When the sentiments directly affect the price behavior of an asset, how can we measure investor sentiments?
As with the stock market, investors are concerned about holding assets when there is a crisis causing selling pressure to the markets. That is when analysts pick up an index to analyze as a proxy to see the level of panic of investors in the US stock market.
We described above the Volatility Index, also known as the VIX Index, which takes the trading volume in the derivatives market and uses it to create an index.
This movement in the VIX will align with institutional and high-net-worth investors’ market sentiments and investment strategies.
In the crypto market, a similar index can be used to gauge investor sentiments: the Crypto Fear and Greed Index.
What is the Crypto Fear and Greed Index? How can we use it in analyzing the investment in Bitcoin?
An index is created to measure the greed and fear of investors in the crypto market. It is used to analyze the behavior of investors in the crypto market.
Investors receive news promptly when important events occur in the market, either positive or negative. They can make decisions immediately without waiting for the market to open during business hours.
Now, imagine that the investors worldwide receive the news simultaneously. It can cause behavior like “FOMO buying” or “panic selling” more quickly than in other investment markets.
When there is a demand influx to buy or sell within this 24/7 market, the Crypto Fear and Greed Index is used to analyze investor behavior to help improve decision-making.
Therefore, one is not tied and influenced by the mood of the market, which may very well make investors better follow their investment plans. A famous example of the index used here comes from the website alternative.me.
The Crypto Fear and Greed Index ranges from 0 to 100, where 0 represents the state of extreme fear among investors, which may cause intense selling pressure.
The value of 100 has the opposite meaning: investors are getting extremely greedy. There may be some FOMO-induced buying momentum.
The website has utilized data from 5 sources to formulate the Crypto Fear and Greed Index.
Factors in calculating the Crypto Fear and Greed
When creating an index, it is imperative to note that there is a need for some indexing rules.
At present, only Bitcoin is included in the index. Since Bitcoin is a cryptocurrency, when it experiences volatility, it will have the most considerable effect on the market. This fact has also led to other criteria for indexing, including:
- Volatility 25%
It is calculated from the volatility and maximum drawdown of Bitcoin’s price, compared to the 30-day and 90-day average volatility. When volatility increases, this shows enthusiasm in the market.
- Market Momentum/Volume 25%
It is calculated based on momentum and trading volume-like volatility by comparing the 30-day and 90-day moving averages when there is a substantial volume on the buy side when the market is up. It translates to investors’ greed in the market.
- Social Media 15%
Use Hashtag (#) for each cryptocurrency for analysis. The calculation is done with the rate and number of responses.
- Surveys 15%
Surveys on opinions on the website, which is temporarily closed
- Dominance 10%
The percentage of Market Cap. of Bitcoin and Altcoin, looking at Bitcoin as a haven when fears arise in the market and looking at Altcoin for speculating purposes only.
Therefore, looking at the share of Market Cap. can give insights into investors’ sentiment, but of course, this is still controversial as the increase of the Altcoin market cap could be due to genuine interest from investors.
- Trends 10%
Using Google Trends, which analyzes keywords related to Bitcoin. If the search count for Bitcoin-related words increases, this is reflected as investors showing an increased interest in the cryptocurrency market.
Test data when used with Bitcoin.
Graph of the Crypto Fear & Greed Index from the alternative.me (Figure 1)
Graph of Bitcoin price (Figure 2)
Taking the Crypto Fear and Greed Index into consideration along with Bitcoin’s price, we find that when the Crypto Fear and Greed Index touched the green line in Figure 1 at around 10, the price of Bitcoin rose from its lowest level 5 times with details as follows.
- Increase 1 +70%
- Increase 2 +45%
- Increase 3 +310%
- Increase 4 +25%
- Increase 5 +300%
Vice versa, if the Crypto Fear and Greed Index is approximately 90 (red line on Figure 1), the Bitcoin price sees a decrease from its highest level twice with details as follows
- Decrease 1 -40%
- Decrease 2 -45%
Looking at the test results, it seems that we can use the Crypto Fear and Greed Index as part of our crypto investment analysis.
However, we must not forget that the real purpose of indexing is to measure investors’ sentiment in the market, and it is not used as a buy-sell signal. However, users may get lost in the market sentiment if it is used as such.
In summary, the Crypto Fear and Greed Index can measure investors’ fear and greed in the crypto market. However, this is only to track investors’ sentiments in the market, whereas using it for indicating buying and selling signals must involve other factors.
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