The pricing of cryptocurrencies gets influenced due to all crypto investors’ persistent sentiments. These sentiments arise based on factors that are directly related to established crypto investment strategies.
Contextually the crypto fear and greed index acts as an indicator helping retail investors and businesses to predict market behaviours. This saves considerable time otherwise spent on performing detailed market analysis. Typically, this reading varies from 0 to 100 where the lowest status points to severe fear while higher scores refer to acute greed. Here, you will know about this in detail.
What is the Meaning of Crypto Fear and Greed Index?
It is a metric that is published based on various crypto market trends and overall response of the prominent digital currency holders. The main reason for considering this reading to be an index is that it produces a cumulative reflection of data collected from multiple trustworthy sources.
The crypto fear and greed index is composed of four alert zones that are represented by different colours:
- Extreme fear or orange zone (Marking remains between 0 – 24)
- Fear or light yellow or yellow zone (Marking remains between 25 – 49)
- Greed or green zone (Marking remains between 50 – 74)
- Extreme greed or deep green zone (Marking remains between 75 – 100)
As per the conventional trading mindset, when this fear and greed index is close to 1 it demonstrates an excellent buying opportunity. This is because when reading hovers across the orange zone, most of the investors fear a sharp dip. You can use this situation to your advantage and increase your crypto holdings to balance your portfolio. Implementing this strategy may benefit you in the long run as the prices remain deflated at this time.
How is the Crypto Fear and Greed Index Calculated?
Various platforms recording data of internet users globally, crunch the investors’ sentiments to manifest an easy-to-relate figure. While doing so they consider several determiners that have been listed below:
One of the major factors determining this index is Bitcoin’s craze among the overall pool of crypto traders. Generally, when the popularity of Bitcoin goes up it indicates that the investors are more fearful. Approximately 10% of the fear and greed index depends on this dominance component.
Market-wide surveys take place every week where crypto investors post their opinions voluntarily. These enquiry forms note down responses of a significant number of active traders (usually varying between 2000 and 3000). The fear and greed index soars if the survey results reveal high enthusiasm toward buying assets.
The volatility factor takes into consideration all major drawdowns. A drawdown refers to the diminution of top-ranking cryptocurrencies over the previous 30 days to 90 days. If the final output of this component becomes high it positively impacts the index. Volatility plays the biggest role in determining the fear and greed index resulting in almost 25% of the ultimate reading.
- Social Media
The index partially relies on consumer behaviour across leading social media platforms. Usually, discussions take place involving specific hashtags and mentions that directly correlate to the crypto world. Analysts track these records and attempt to draw precise comparisons against a similar previous array of datasets. A greater volume of mentions and hashtags indicates an agile market and eventually higher index.
- Google Trends
Google trend numbers play a notable role in deciding the fear and greed index. At least 10% of the index relies on this part where greater traffic involving the appropriate phrases shows substantial greed in the global crypto market.
This conclusive factor evaluates the current market trends against the most recent daily averages (typically records from the past 3 months). If this metric is high, it corresponds to more greed. For this reason, you must consider momentum to be a negative indicator that prominently influences the index, almost by 25%.
How Can You Use the Fear and Greed Index to your Advantage?
As you presumably know, the cryptocurrency market may occasionally be unpredictable. This happens mainly because of investors' emotional responses to the market.
When the market is rising, typically the mass experiences desperate urges and become avaricious. Similarly, when the market takes a dip, they may likewise panic and sell their holdings. To reduce the chances of getting caught in these traps, many traders use the index as a market indicator, so they may trade more intelligently.
All platforms churning out the index advise you to continue successful crypto trading backed by these guidelines:
- Global cryptocurrency investors' excessive fear may present a favourable purchasing opportunity in times of extreme panic.
- On the other hand, extreme greed may indicate that investors are acting aggressively and that a market downturn is shortly pending.
Can You Rely on Crypto Fear and Greed Index for Long-Term Trading?
Generally, this index does not always hold true in cases of long-drawn bull runs. Instead, it responds to breaking news and momentary fluctuations in the cryptocurrency market. These factors make it more popular among traders as a short-term indication than a long-term one. As one may anticipate, intraday and swing traders particularly prefer this index.
It is hard to precisely anticipate how cryptocurrency values will move in the future. However, prominent metrics, such as the fear and greed index, provide meaningful information. That is why prospective investors and crypto enthusiasts need to comprehend the correct use of this index.