What is Fear & Greed Index?

 

Sentiment is one of the important factors affecting cryptocurrency prices. Among them, fear and greed are the most powerful emotions that can influence investor behavior. Here, let's learn about the index that shows investor sentiment through the following contents:

What is the Fear & Greed Index? 

How the index works

Benefits & limitations that the index brings 

Should it be used in long-term analysis?

Fear & Greed Index is very popular in market used in various financial markets. In this article, I will focus on the Fear and Greed indicator used in the crypto market.

The Fear and Greed Index ranges from 0 to 100. This index is measured based on the following 5 factors:

Voltality - Voltality

Market Momentum / Volume - Market Momentum/Volume

 Social media - Social Media Bitcoin Dominance

 Google Trend - data from Google 

Where 0 represents the extreme fear of investors that can cause strong selling pressure. A value of 100 has the opposite meaning: investors are being extremely greedy. There may be some buying impulse caused by FOMO.

Meaning of Fear and Greed Index

Investors often tend to be greedy when the market is bullish which leads to FOMO (Fear of Missing Out). And they often sell their assets when they see the market drop - fear psychology. There are two simple assumptions:

Extreme fear can be a sign that investors are getting too nervous. 

That could be a buying opportunity. When investors get too greedy, it means the market is about to correct.

The Fear and Greed Index analyzes the current sentiment of the Bitcoin market and collects the numbers into a simple unit of measure from 0 to 100. Zero indicates "Extreme Fear" and 100 is the Extreme greed".

How the greed and fear index works

Fear & Greed Index has a new value from 0 to 100. Every day at 7 am (Vietnam time) this index will be updated.

As of July 2021, the Fear and Greed Index for Cryptocurrencies only uses Bitcoin-related indicators and information. In the future, this indicator may also include other top coins such as Ether (ETH) or BNB .

The index below is divided into 4 main colors, with each color expressing different emotions:

0 - 24: Extreme fear (orange)

25 - 49: Fear (amber/gold) 

50 - 74: Greed (light blue)

75 - 100: Extreme greed (green)

To create the Fear & Greed Index, Alternative.me used the following 5 parameters:

Volatility - Voltality (25%)

Measure current volatility and Bitcoin maximum withdrawal value and compare it with the respective averages of the past 30 days and 90 days. 

Thereby, an unusual increase in volatility is a sign of a scared market.

Social Media - Social Media (15%).

Gather and count reddit posts and test the speed and number of interactions they receive in certain timeframes. 

The unusually high engagement rate has led to a growing interest in the coin. This corresponds to greedy market behavior.

Bitcoin Dominance (10%)

Bitcoin Dominance - Bitcoin dominance (% of Bitcoin's capitalization to total market capitalization) is also one of the important factors forming this index. 

When the BTC Dom increases, it shows that the capital flow is in Bitcoin. Conversely, when the BTC Dom fell, the capital flow is now in Altcoins.

Google Trends - data from Google (10%)

Google Trend data to query various Bitcoin related searches and process those numbers. 

The change of search volume as well as popular searches is also one of the important factors expressing public sentiment. 

Survey (15%) - currently on hiatus

Should Fear & Greed Index be used in long-term analysis?

 As I mentioned above, this index is updated every day at 7 am (Vietnam time) so it will be short-term. Often used by traders to look at the sentiment of the crowd during the day.

Therefore, this indicator is not suitable for long-term analysis of market cycles. This can be understood simply that you cannot analyze the BTC chart to find an entry point at the 15 minute 1 hour frame but holding for 1 year is not reasonable.

This indicator is very useful for traders in the short term, applying to rotate their capital. However, for investors looking to hold the asset for the long term, it can be difficult to predict a change from a bull market to a bear market from the index alone. It is necessary to analyze other market aspects to get a long-term perspective.