The Cryptocurrency Fear and Greed Index, Explained
While it’s impossible to completely predict the coming movements of crypto investments, certain indicators like the Fear and Greed Index supply actionable insights.
If you are a cryptocurrency investor, you have probably come across the Crypto Fear and Greed Index on social media or in the news. The Crypto Fear and Greed Index is a metric designed to measure sentiment in the cryptocurrency market at any given point in time. It’s important to understand the structure of the index, what it tracks, and what it tells you about the market so you can decide if it’s an indicator to consider in your investment decisions.
What is the Crypto Fear and Greed Index?
The index generates a single number between 1 and 100, with 1 indicating the crypto market is in a state of extreme fear (meaning people are selling), while at the other end of the spectrum, 100 indicates the market is going through an extreme level of greed (which means people are buying).
A prevalent rule of thumb is that when the index value is at 1, this normally connects to a buying chance. This is because the number 1 indicates “extreme fear” in the market, meaning people are scared of purchasing at this time, and the price may be deflated as people visit away or sell over fears the cryptocurrencies are going to the reduce value. As billionaire American investment guru Warren Buffett once said, “buy when there’s blood on the roads.”
How the Fear and Greed Index is calculated
So how do they come to the final number? There are other factors that influence the ultimate output.
- Volatility: The index compares volatility and maximum drawdowns (a drawdown is a fall in value) to the 30-day and 90-day average volatility and drawdown numbers. Higher volatility is considered fearsome and increases final production. Volatility accounts for 25% of the index value.
- Momentum/Volume: The index measures the current momentum and volume of the Bitcoin market. Again, compared to the 30- and 90-day moving averages. High volume and momentum are considered negative metrics and increase the index’s bottom line profit production. The boost/volume is 25% of the index value.
- Social Media: The index tracks mentions and hashtags for Bitcoin and compares them to historical averages. Higher mentions and hashtags are interpreted as higher market share and result in an increase in the index’s final output. Social networks account for 15% of the index value.
- Surveys: The index conducts big, market-wide surveys on a weekly causality. Usually, there are 2,000-3,000 participants in every survey. a lot of evangelical survey results drive the index higher, inform to promote greed prevailing. Surveys represent 15% of the index value.
- Dominance: The index estimates Bitcoin’s dominance in the overall market. The higher the Bitcoin dominance, the more fearsome the market – as interpreted by the index. As alternative coins earn market share, the market is performing courageously and not fearfully. The more down the Bitcoin dominance, the greedier the market is becoming. Dominance describes10% of the index value.
Is the Fear and Greed Index reliable?
The question becomes: Does the fear and greed index supply insight into the coming price of cryptocurrency?
LookIntoBitcoin.com has charted the Cryptocurrency Fear and Greed Index against the Bitcoin price, going back to 2018.
The price and index value seem to be perfectly correlated – albeit over a relatively short period of time. A higher Bitcoin cost seems to have led to a higher Fear and Greed index value.