The Fear and Greed Index is a tool that traders and investors can use to analyse the sentiment of the Bitcoin and cryptocurrency markets. It reveals the degree to which the market is turning excessively fearful or excessively greedy.
The Fear and Greed Index is a metric used to measure market sentiment among buyers of bitcoin. Market sentiment is to describe how investors feel about the state of the market as a whole. The theory is that when the market is unduly fearful, it might mean that Bitcoin is now undervalued. This could be a good moment to buy.
Also, if the Fear and Greed Index shows extreme greed, it may mean that the price of Bitcoin is expensive. It would be a good time to sell.
Why Is It Useful?
The two main psychological emotions that can affect investor behavior are fear and greed. This also applies to the Bitcoin market. Therefore, being aware of market mood is crucial to helping us choose whether to enter or quit a position. According to the premise that extreme fear tends to drive down the price of bitcoin and excessive greed tends to drive the price up, investors typically follow the Index.
The Fear and Greed Index has a straightforward 0–100 scale and is color-coded as such, with 0 being red and 100 being green.
The current value of the Crypto Fear and Greed Index. Image credit: Alternative.me
It may be a hint that many Bitcoin (BTC) and cryptocurrency investors are very anxious about the price falling further if the score is red and close to zero, which denotes extreme panic. Investors may not be acting rationally at this moment due to the current high level of cryptocurrency anxiety.
When the score is green and approaching 100, this indicates extreme greed and may mean that many Bitcoin (BTC) and cryptocurrency investors are overly optimistic about the prices continuing to rise significantly in the future.
The Index creates a number by combining data from several sources. This value lies on a scale from 0 to 100, where 0 represents the most fear and 100 represents the most greed. The Index has four categories on a scale from 0 to 100 i.e. Extreme Fear is 0 to 24, Fear is 25 to 49, Greed is 50 to 74, and Extreme Greed is 75 to 100.
To determine the score, the Index pulls information from different sources such as Volatility, which contrasts the price of bitcoin now with its average price over the previous 30 and 90 days. Bitcoin trading volume and market momentum during the previous 90 and 30 days.
What people are saying about bitcoin on social media, or social media sentiment. Market share of Bitcoin relative to all other cryptocurrencies (also known as Dominance). Look for patterns among pertinent Bitcoin search terms to spot significant upswings or downswings.
Is It Reliable? Few examples
As the index’s value fluctuated between 10 and 20, from the end of November to the middle of December 2018, it flashed Extreme Fear on a regular basis. Coincidentally, this was a wonderful buying opportunity, as Bitcoin swung around $3,000 to $4,000 before soaring all the way to $13,000 per BTC in June 2019, as previously mentioned.
The fear and greed index for Bitcoin on June 26th, 2019 recorded a value of 95 (out of 100). It was indicating Extreme Greed. The index, which has data stretching back to February 2018, has never recorded a rating higher than 95 at the time.
Coincidentally, this provided a favorable selling opportunity, as Bitcoin reached its 2019 peak price of $13,000 per BTC on June 26. It also lost nearly half its value over the following 6 months. BTC hit $6,640.52 per on December 17th, 2019.
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Images courtesy of TradingView.
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