What is cryptocurrency Fear and Greed index?
This is the mood indicator that shows which of these emotions is dominant in the market.
Traders are just like any other people – they are subject to emotions and can be influenced by them. That's why special indices were created, which help to understand when caution is necessary and when it is safe to act boldly. The Greed and Fear Index is one such tool, providing insight into the emotional state of investors and helping them make more informed decisions. By analyzing data from a variety of sources, this index offers a snapshot of the market mood, offering a glimpse into whether fear or greed is currently dominant among investors.
Greed is characterized by investors' increased desire to buy assets. Fear, on the other hand, causes them to exit the market and be afraid to make large purchases while waiting for better times.
CNN produced the original version of measuring this characteristic. The creators looked at 7 market indicators and assessed how significantly they differed from the average. The developers combined the results and revealed the formula of the "Fear and Greed Index".
The Fear and Greed Index for crypto was created by two web developers - Gregor Krambs and Victor Tobis. Their development is based on the idea of CNN, adapted for the first cryptocurrency. It was supposed to be Bitcoin as an indicator for the rest of the crypto market, so another name - greed fear index BTC.
The Fear and Greed Index has a score of 0 to 100. A low score indicates fear, which leads to a sell-off of assets and a fall in the cryptocurrency market. A higher score means that greed is present and people are buying cryptocurrency.
Externally, this parameter resembles a classic measuring device with an arrow that shows the prevailing emotions in the market. If the arrow is in the red zone, it means that investors are feeling fear. The arrow in the gray zone indicates a neutral mood, and the arrow in the green zone indicates a state of greed.
The Fear and Greed Index has exactly five parameters:
- Extreme Fear - shows that there is a panic mood in the market, and after a certain period it may start to grow.
- Fear - a medium level of fear, which allows you to work with long positions, but carefully.
- Neutral - the market is calm.
- Greed - a medium level of greed among investors, it is not recommended to play with short positions.
- Extreme Greed - the market needs an urgent correction due to a strong price rise.
As it can be understood from the above, thanks to the Fear and Greed index the current market mood is shown.
Why do we measure the level of fear and greed?
As we mentioned, the parameter shows investors' intentions for digital assets. When the indicator is in the "fear" area and investors are "scared", they are more likely to sell, while if they become "greedy" they are more likely to buy.
Put another way, the index gives a signal to investors about the situation in the crypto market, based on which they can build their trading strategy.
At the same time, it is worth understanding that the Fear and Greed Index alone is not enough for evaluation. Take advantage of additional market analysis tools before making a decision.
There are plenty of services that offer the crypto Fear and Greed index real time. In addition, you can always examine the crypto Fear and Greed index chart to determine the mood of the market at any particular time.
If you examine the Bitcoin Fear and Greed index historical chart over the past few months, you can clearly see that the market is dominated by two extreme forms of the index - fear and strong fear. This is due to the fact that the price of the world's most popular coin has dropped as low as it has not dropped in several years. It is difficult to see the prerequisites that may indicate a recovery of its value.
In other words, the BTC Fear and Greed index today range in weight from 15 to 20.
Index measurement parameters
The index is primarily calculated based on Bitcoin, not the entire crypto market. This is taken because Bitcoin, being the largest cryptocurrency, reflects what is happening in the crypto market in terms of price movements and the general market mood. Thus, the index is also relevant for other major cryptocurrencies such as Ethereum, Solana, Cardano, Tether, etc. And it doesn't matter if you trade cryptocurrencies on the Revolut or eToro platform, because the parameter displays market mood in general.
The Fear and Greed Index uses six different parameters to determine the emotional state of the crypto market. These parameters are evaluated in the same way each day to provide a clear picture of changes in market sentiment. By tracking these metrics over time, investors can gain a better understanding of the factors that influence market behaviour and make more informed decisions about when to buy and sell.
The current volatility and maximal BTC drop are measured and compared to the relevant averages of the last 30 and 90 days. An unusual volatility spike is a sign of a "fear" market.
Market Momentum and Volume (25%)
Current volume and market momentum are measured, then the two values are compared. As a rule, if the daily high volume of purchases is recorded against the background of positive market conditions, it means that market players are too greedy.
Social Media (15%)
At the moment, this parameter is determined by analysis on Twitter. This online media collects and counts messages with different hashtags for each coin. It then analyzes how quickly and actively users reacted to these messages over certain periods. Unusually active reactions lead to an increase in public interest in the coin and, according to the developers, reflect the greed of market players.
In collaboration with strawpoll.com, the developers of the Fear and Greed Index conduct weekly surveys to gather insights into how people perceive the current state of the market. Each survey includes 2000-3000 participants, providing a representative sample of the mood of cryptocurrency investors. By analyzing the responses to these surveys, the Fear and Greed Index provides a snapshot of the emotional state of the market, offering insight into whether fear or greed is currently dominant among investors. This information can be useful for traders who are looking to make more informed decisions and potentially improve their chances of success.
A coin's dominance is something similar to a coin's percentage of total market capitalization. In the case of Bitcoin, developers believe that Bitcoin's rise in dominance is caused by the fear of extremely speculative investments in altcoins. For this reason, Bitcoin is becoming a safer tool for preserving capital. Conversely, when BTC's dominance decreases, it means that people are being overly greedy by investing in riskier altcoins, dreaming of the opportunity to participate in a new large-scale bull rally. It is worth noting that the rise in dominance of any altcoin, on the contrary, causes more interest in the coin and can lead to extremely greedy behavior in the market for that particular coin.
The Fear and Greed Index uses data from Google Trends to analyze various search queries related to Bitcoin. The focus is on changes in the volume of search queries and on recommended and popular queries at the current time. By looking at this data, the Fear and Greed Index can gain insight into the level of interest and curiosity about Bitcoin, and how it is changing over time.
How do you confront fear and greed?
While you may not be able to control the overall mood of the cryptocurrency market, you do have the power to resist the emotions that can interfere with your ability to trade effectively.
Some research work done by behavioural economists has suggested that fear and greed can interfere with the proper functioning of our brains. It causes people to ignore rationality and self-control. There is no generally accepted research on how greed works at this time. However, it has been proven that fear and greed can be the most powerful motivators for investment decisions. This is because most investors are emotional about money and therefore react to fear or greed.
For this reason, fear and greed are the two main emotions to watch out for. Fear shows up as you watch the crypto Fear Greed index live, either by not opening a trade when your strategy gives you a signal or by exiting too early. Greed can cause you to increase your risks, increase your leverage, and violate your risk management.
One of the most effective ways to overcome fear when it comes to investing in the market is to make sure you never put yourself in a position where you are risking more than you can comfortably afford to lose. By setting clear boundaries for yourself and sticking to them, you can avoid letting fear dictate your choices and instead approach the market with confidence and a clear head. This can help you make more informed, rational choices and potentially improve your chances of success. Additionally, it is important to remember that no investment is without risk, and even the most experienced investors can sometimes suffer losses. By keeping this in mind and staying within your risk tolerance, you can avoid letting fear overwhelm you and potentially sabotage your success.
Develop your strategy and use it. Keep in mind that a trading strategy that may work well for one person may not work well for another. This is because everyone has a different style of thinking, education, patience, and even gender matters. It's always best to develop your own individual trading plan and modify it as you go along.
If you can't decide which strategy is best for you, copy trading is just what you need. With it, you can use the experience of professional traders by copying their trades. This strategy will also work for those who are inexperienced in trading or have limited time.
There is another way to get rid of your negative emotions - using cryptocurrency trading software. If the current Bitcoin Fear and Greed index is affecting you too much, try this option. First, trading robots like Bitcoin robot are not subject to fear and greed, hence they will not affect the trading process. Second, they will save you from having to constantly monitor the market. Third, they will save you from other mistakes that are inherent to humans.
You can also automate your trading strategy with TradingView automated trading, a platform and social network for traders and investors. It's the best place where you can find lots of charts for any digital asset. In addition, thanks to the platform's built-in proprietary PineScript language, you can automate any cryptocurrency trading strategy.
Don't forget that you can also use the Fear and Greed Index to your advantage. For example, sometimes one looking at the crypto Greed Fear index graph is enough to capture the mood of the market and enter the best deal. Recall that the index makes it possible to estimate how much investors are willing to pay, as well as to assess the fairness of prices formed on the crypto market. The logic is simple enough: fear makes everyone get rid of stocks. The bigger it is and the faster players get rid of assets, the harder their value falls. Greed makes people hold on to them, pushing prices higher.
What is the bottom line
The Fear and Greed Index is a good instrument to carry in your arsenal so you can figure out the mood of the market. It can be used to form theories about upcoming developments, so the search "Fear and Greed crypto index today" is very famous among traders and experts.
The BTC Greed Fear index is not 100% accurate, and it is not always useful to make predictions. In other words, it only shows the current market atmosphere and any solutions for future investments require extra data for analysis. Although excess greed or fear may signal an impending reversal, it is impossible to predict how long the market may remain in either state. Therefore, in addition to analyzing crypto Fear Greed index history, you should do your own research to make sure that any strategy using this indicator is actually profitable.