With the rise of the cryptocurrency market, the application of the Fear and Greed Index has gradually expanded to this emerging asset market, becoming one of the important reference indicators for investors to formulate strategies. Provided by the data website Alternative.me, it uses 0~100 points to represent the emotional state of the market. The following article will introduce the 3 key points of the Cryptocurrency Fear and Greed Index at a time, a comprehensive guide from scratch
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The price fluctuations in the cryptocurrency market are not only affected by fundamentals, but also by the emotions of investors. This article will introduce the Cryptocurrency Fear and Greed Index, which can help us understand the changes in market sentiment and serve as a reference for adjusting investment strategies. Although it cannot accurately predict price trends, using it together with other analysis tools can effectively avoid emotionally driven investment decisions!
The Investment Market is Made Up of People, so Mastering Emotions is Very Important
Just like people have emotions such as joy, anger, sorrow, and joy in life, in the investment market, we can often see asset prices fluctuate sharply up and down with the emotions of investors.
Especially in the cryptocurrency market with high price volatility, if we can grasp the "emotions" of investors, does it mean that we can grasp the price volatility trend of cryptocurrencies? Below, we will introduce you to a "Cryptocurrency Fear and Greed Index" to help you understand how to understand the emotional reactions of current crypto market investors through observation indicators, and then optimize and adjust your crypto investment strategy!
What is the Cryptocurrency Fear and Greed Index?
The concept of the Fear and Greed Index first came from the traditional stock market. For example, CNNMoney uses this index to analyze the market sentiment of the US stock market, that is, the S&P 500 index. By statistically analyzing investor sentiment, market trading volume and other information, an index is integrated to try to infer whether people in the current investment market are optimistic about the market rising or pessimistic about the market falling. However, with the rise of the cryptocurrency market, the application of this index has gradually expanded to this emerging asset market, becoming one of the important reference indicators for community investors to formulate strategies. The most well-known Fear and Greed Index in the current cryptocurrency market comes from the data website Altermative.me, which is calculated based on parameters such as trading volume, social media popularity, and Google search trends, and uses 0~100 points to represent the emotional state of the market:
·0~24 points are considered Extreme Fear
Market panic reaches an extreme. At this time, a large amount of negative news may appear in the investment market, such as economic recession, project bankruptcy, and other news, which makes most investors express pessimistic emotions on the community, and cryptocurrency prices often experience a sharp decline.
. 25~45 points are considered Fear
The current market sentiment is low, and more investors are holding pessimistic sentiments about the current or future market. Admittedly, it is not necessarily accompanied by a decline in cryptocurrency prices, but often the community voice will not be dominated by "optimistic sentiments such as a surge in the future.
. 46~54 points are considered Neutral
At this time, the market sentiment is neither up nor down, there are both optimistic voices and pessimistic views, and the trading volume is in a state of neither hot nor cold.
. 55~74 points are considered Greed
Market sentiment is leaning towards optimism, and cryptocurrency investors or more inclined to buy rather than sell. At the same time, the trading volume may increase. Usually, there are many positive news releases in the market, such as the project will expand services with more partners, and more institutional funds will enter the cryptocurrency market.
. 75~100 points are considered Extreme Greed, which usually means that the market is overly optimistic, and may be the area where a price bubble is formed. Investors may overestimate the price that the current market should actually be worth, and usually more "new" crypto investors enter the market under the rendering of continuous positive news and a great future, further pushing up the already overvalued market price.
How to Read the Cryptocurrency Fear and Greed Index Chart?
The following is a visualization of the Cryptocurrency Fear and Greed Index compiled by Alternative.me:
· The left side shows the current Fear and Greed Index (0~100 points);
The middle shows the time, which is divided into Now, Yesterday, Last week, Last month; the rightmost side shows when the latest information of this index will be updated (once a day).
How do Fear and Greed Affect the Cryptocurrency Market?
There is a term in the crypto world called [FUD], which stands for Fear, Uncertainty, and Doubt. In real life, when people are afraid, they are more likely to avoid risks. For example, when we learn that there is a risk of a global economic recession, we want to sell the cryptocurrencies, stocks, and other assets in our hands as soon as possible to avoid these projects and companies from going bankrupt or losing money in the economic downturn, which will cause us greater losses. It is better to have a short pain than a long one, so we should quickly sell these assets.
However, the so-called "fear" is often due to irrational emotions brought about by certain uncertainties. Just like when the global COVID-19 pandemic first began to spread in 2020, there was an atmosphere in society that "the global economy is going to be over." Many cryptocurrencies and company stocks were constantly sold off in people's panic emotions, and the emotions snowballed. In hindsight, it was actually the best "good time to buy the dip" for cryptocurrency investors.
The Cryptocurrency Fear and Greed Index at the time showed that the overall investment market sentiment in the crypto world in 2020 was relatively low, averaging below 50, and often showing fear emotions below 45 points. At that time, the price of Bitcoin once fell below $4,000. But when the market calmed down, Bitcoin quickly rebounded to above $10,000, highlighting the gap between market fear and realistic fair value.
In terms of optimistic sentiment, there is also a term in the crypto world called [FOMO], which stands for Fear of Missing Out, which means that people irrationally and frantically buy in because they are afraid of missing the trend of "continuously rising prices". During the 2021 cryptocurrency bull market, due to the emergence of positive news such as Paypa| joining the market, the NFT craze, and the metaverse virtual world, the cryptocurrency community presented a very optimistic atmosphere, and the market trading volume continued to rise, and more and more people began to participate in this market, making
Cryptocurrency prices are constantly pushed higher. Taking November 2021 as an example, Bitcoin reached a record high at that time. In the market frenzy, the Bitcoin price broke through $68,000, and the Fear and Greed Index once reached an extreme greed of 94 points. The overly optimistic market atmosphere led to many investors FOMOing in, and people are irrationally buying overvalued assets.
How to Calculate the Cryptocurrency Fear and Greed Index
From the above description, it seems that this Fear and Greed Index is quite accurate and can capture the atmosphere of the market at that time, and it also matches the Bitcoin price. So how is it calculated?
In fact, the Alternative.me website does not publish all the calculation details in detail, but the official website lists the following information worth referring to. The calculation method mainly includes:
1. Volatility accounts for 25%:
Large price fluctuations usually mean that market fear rises, while a relatively stable market represents stronger confidence. For example, in May 2022, the Terra/LUNA incident caused a sharp drop in the market, and Bitcoin's single-day volatility exceeded 15%. At that time, the Cryptocurrency Fear and Greed Index "quickly" fell below 20 (Extreme Fear).
2. Market Momentum/Volume accounts for 25%: When the trading volume increases and the price rises at the same time, it often indicates that market greed is rising. For example, in October 2021, when Bitcoin officially broke through $60,000, the trading volume saw a significant increase, which pushed the index close to 90 (Extreme Greed) points.
3. Social Media Reaction accounts for 15%:
By observing the "changes in popularity" discussed on social media, it can also affect market sentiment assessment. For example, when there are more tweets with [#BitcoinToTheMoon], it means that more cryptocurrency investors are very optimistic about the future market, which means that the market is more greedy and the score will rise.
4. Bitcoin Dominance accounts for 10%:
When Bitcoin's market share rises, it means that investors are more inclined to reduce risks, because Bitcoin is a relatively stable currency in the entire cryptocurrency market in terms of volatility and expected return; conversely, when funds turn to other altcoins (such as Solana, XRP, etc.), it means that the market is more greedy. For example, in May 2021, Bitcoin's market share once fell from 70% to 40% in just a few weeks, indicating that market greed was soaring and investors were more willing to turn to high-risk, high-return project targets.
5. Google Trends accounts for 10%:
For example, when the search volume of keywords such as [Bitcoin crash] increases, it usually indicates market fear, because more people are worried about whether the market will really crash. From another perspective, when people actively participate in the cryptocurrency market, such as when the search volume of [buy Bitcoin] increases, it means that the market sentiment is relatively optimistic.
6. Surveys account for 15%:
The Alternative.me official website clearly and significantly states that they will evaluate the overall sentiment of the current market through investor questionnaires, but the author has not found relevant information on the actual methods.
In short, the Cryptocurrency Fear and Greed Index is like an "emotional report" of the cryptocurrency investment market. Some analysts believe that when the index is inclined to fear, it means that investors can consider buying on dips; when the index shows extreme greed, it may mean that the market is about to overheat and fall back. Understanding these signals can help us make more rational trading decisions when investing and avoid making irrational investment behaviors due to market sentiment fluctuations.
Can the Cryptocurrency Fear and Greed Index Predict Bitcoin Prices?
However, writing here, more experienced investors should want to ask a question: [If the Fear and Greed Index is so accurate, can it be used directly as a standard for buying and selling Bitcoin?]
The answer is: "No, because the Cryptocurrency Fear and Greed Index cannot accurately predict the prices of Bitcoin and other cryptocurrencies." Below, we will compare in detail the differences between the Fear and Greed Index and the Bitcoin price trend.
From the above figure, we can see: · The line graph in the upper half where green and red intersect: the price trend of Bitcoin from 2021 to 2022 · The black dotted line in the lower half (orange label): the trend of the Fear and Greed Index from 2021 to 2022 We can clearly see that the trends between the two are actually very similar, but they are not completely related to each other. The current Fear and Greed Index cannot predict the future direction of Bitcoin prices.
For example, when the Fear and Greed Index exceeds 60 points and the market is in a more greedy mood, it does not mean that it is a great time to sell. On the contrary, we may miss out on a large increase. On the other hand, when the Fear and Greed Index is below 20, it does not mean that it is the best time to buy, because the market may not rebound quickly afterwards, and the price may not be the best relative low point in the long term.
In conclusion, relying solely on the Cryptocurrency Fear and Greed Index as the only indicator for trading strategies is quite weak, because a temporary market slump does not mean that the long-term market will continue to be sluggish (falling). Conversely, a temporary market optimism does not mean that the market will be optimistic (rising) in the long term.
Three Key Points to Note About the Cryptocurrency Fear and Greed Index
1. The Cryptocurrency Fear and Greed Index is a lagging indicator
Admittedly, the Cryptocurrency Fear and Greed Index can well reflect the current market sentiment and is highly correlated with Bitcoin prices, but as we mentioned earlier, this indicator [only updates once a day], which means that it cannot observe the market sentiment at this moment in time, and it is also a lagging indicator. The Cryptocurrency Fear and Greed Index is more like consolidating and observing the market sentiment profile within a day, rather than predicting future prices. For example, in the 2021 cryptocurrency bull market, even if the Fear and Greed Index in October reached 75 (Extreme Greed) or above, the price still continued to rise.
The Cryptocurrency Fear and Greed Index Has Its Limitations
There are many factors that affect the cryptocurrency market, including but not limited to: · Macroeconomic changes such as the US Federal Reserve's expected interest rate cuts, which make the market believe that global funds will start a more relaxed trend, which will lead to a rise in Bitcoin prices. Changes in regulatory policies in various countries, such as China's ban on Bitcoin mining, which caused a large-scale withdrawal of miners and the 519 incident that caused Bitcoin prices to plummet. · Technological development or innovation, such as the upgrade of Ethereum 2.0, makes the market believe that the application value of Ethereum will increase significantly, which is a positive factor for the project's fundamentals. Returning to what we said at the beginning, the most important thing in the investment market is "people", and the factors that affect a person's buying and selling are far more than just emotions. Comprehensively observing industry fundamentals, market trends, and other information to help judge investment decisions will be a more stable investment habit.
3. Pay attention to the risks of the project itself
The Cryptocurrency Fear and Greed Index can see the overall sentiment of the current cryptocurrency market, but it cannot see the fundamentals, news, and other information of "individual projects themselves." When judging the target of your investment, you should comprehensively judge the characteristics, future development, and competitors of the project target in hand. Don't be overwhelmed by "emotions" just because of the panic/greed score shown by the Fear and Greed Index, and make irrational investment decisions.
Frequently Asked Questions About the Cryptocurrency Fear and Greed Index
Q1: What is the Cryptocurrency Fear and Greed Index? Alternative.me's "Fear and Greed Index" is calculated based on parameters such as trading volume, social media popularity, and Google search trends, and uses 0~100 points to represent the emotional state of the market.
0~24 points are considered Extreme Fear;
25~45 points are considered Fear;
46~54 points are considered Neutral;
55~74 points are considered Greed;
75~100 points are considered Extreme Greed
Q2: Can the Cryptocurrency Fear and Greed Index Predict Bitcoin Prices?
No. Looking back at historical data, although there is a high positive correlation between the Fear and Greed Index and Bitcoin prices, the current index cannot accurately predict the future direction of prices.
Q3: What parts should you pay attention to when using the Cryptocurrency Fear and Greed Index?
First, the Cryptocurrency Fear and Greed Index is a lagging indicator, and the indicator itself cannot predict Bitcoin prices.
Second, the Cryptocurrency Fear and Greed Index has its limitations. Comprehensively observing industry fundamentals, market trends, and other information to help judge investment decisions will be a more stable investment habit.
Third, you still need to pay attention to non-systemic risks. This index cannot see the fundamentals, news, and other information of individual projects themselves. Don't be overwhelmed by "emotions" just because of the panic/greed score shown by the Fear and Greed Index.
Summary
The Cryptocurrency Fear and Greed Index is a very common and important indicator in the cryptocurrency market. It can help investors understand market sentiment, judge market heat, and plan investment strategies. Although it is not a panacea, it can improve decision-making accuracy and reduce operational errors caused by emotional fluctuations when used in conjunction with technical analysis and fundamental analysis indicators. Although the Fear and Greed Index cannot accurately predict Bitcoin prices, we can still use the current panic/greed score to judge whether the market is overheated or too cold, and then adjust our position allocation in small portions to decide whether to take profits or buy the dip.
The above is the detailed content of What is the Cryptocurrency Fear and Greed Index? 3 Key Points at a Time, Comprehensive Guide from Scratch. For more information about the Cryptocurrency Fear and Greed Index, please follow Liang Ge #BTC再创新高 $BTC