The crypto market is highly volatile, and we often see expressions such as "extreme panic in the market" or "high greed index in the market", which all come from the fear-greed index. So, what exactly is the Fear Greed Index? Let’s take a look.
What is the Fear and Greed Index?
The Fear and Greed Index is a tool that measures crowd psychology in the Bitcoin market. This overall feeling of investors towards market conditions is also called market sentiment.
Why fear and greed?
Fear and greed are the two main emotions in human psychology that can influence the behavior of investors. The Bitcoin market is no exception. Therefore, market sentiment awareness is important in helping us decide when to enter or exit the market.
On the surface, investors generally follow the index’s theory that excessive fear tends to drive down Bitcoin’s price, while excessive greed drives it up. The hypothesis is that extreme fear will increase selling pressure on Bitcoin, driving prices lower and providing investors with buying opportunities. On the other hand, extreme greed drives up demand for Bitcoin, raising the price and providing good selling opportunities.
Accumulate analysis and summaries from multiple data sources to generate a number. This number is measured on a scale from 0 to 100, where 0 represents maximum fear and 100 represents extreme greed. On a scale of 0 to 100, the index is divided into four basic categories: 0 to 24 = extreme fear, 25 to 49 = fear, 50 to 74 = greed, and 75 to 100 = extreme greed.
Meanwhile, the index pulls data from the following sources to calculate the score:
Volatility: Compares Bitcoin’s current value to its average over the past 30 days and the past 90 days.
Market Trends and Exchange Volume: Market trends and exchange volumes for Bitcoin over the past 30 and 90 days.
Social media sentiment: What people say about Bitcoin on social media.
Market Share: Bitcoin’s share of the crypto market relative to all other cryptocurrencies (also known as dominance).
Search Trends: Trends in related Bitcoin search terms to determine whether people are expecting a rise or fall.
Anti-humanity investor
However, one type of investor believes that going against the trend (going against this market sentiment) can outperform the market, also known as anti-human investors. Antihumanists act against conformity. When the market sells off due to fear, they become greedy. When greed prevails and everyone else is buying, contrarian investors will find opportunities to exit the market when prices rise.
Is this Greed and Fear Index reliable?
The answer to this question lies in the data.
Give investors insight into how the index has historically interacted with Bitcoin price.
Historically, the more extreme the feelings about the market, the more likely Bitcoin is to experience a trend reversal. Investors who decide to pull the trigger when market conditions signal extreme fear may enter the market at the beginning of a lengthy bearish period. If profiting financially was as easy as following popular sentiment, we'd probably all be winners. So the index is more effective at predicting broader trends. However, be careful not to use just this single metric to make any investing decisions. We should use it in conjunction with other technical, fundamental and on-chain indicators, especially currently in the uncertain macroeconomic environment we are experiencing. like
