If there’s one word that can best describe the crypto markets, it would be ‘bipolar.’ Bitcoin and other cryptocurrencies tend to swing wildly on both long and short timeframes. The volatility tends to induce feelings of extreme fear and greed amongst traders. In order to succeed, investors need to both understand the sentiment of the market and keep their own emotions in check. To paraphrase the legend Warren Buffet, one must be fearful when others are greedy and greedy when others are fearful. The Bitcoin fear and greed index is an excellent tool for gauging sentiment and can be helpful when evaluating the state of the market.
It attempts to evaluate the strength of current emotions and the general sentiment on the Bitcoin chart by combining data from multiple sources into a single figure.
On its reading, the Bitcoin Fear & Greed Index is restricted to a range of 0 to 100. A value near 0 indicates that the chart has reached extreme levels of fear in the market, while a value of 100 indicates that the metric has reached immense levels of greed. Many experts believe that the fear and greed index is a valuable indication, but it should not be the primary tool used to make investing decisions.
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- Excessive fear on a chart can indicate a favorable risk/reward ratio at extremely low prices, indicating a buy signal.
- Extreme greed on a chart can suggest that there is little reward left and that the risk of holding at elevated price levels is growing. This greed can be an indication to lock in profits while they are still available.
Trading can be an extremely emotional experience. When the price chart goes up so quickly, it elicits greed amongst participants and causes them to buy into the rally. On the other hand, rapid drops in price can compel traders to sell their holdings out of fear.
Intelligent traders have been using a fear and greed index to analyze market sentiment before Bitcoin even. CNN Money devised one such metric, which takes into several factors to calculate the amount of fear and greed in the market, including:
- Market volatility
- Options volume
- The performance of stocks vs. bonds and other safe-haven assets
- The S&PP500’s performance is relative to the 125-day moving average.
At the moment, the S&P500 fear and greed index is at 44, a level suggesting moderate fear.
What is the Bitcoin Fear and Greed Index?
The Bitcoin fear and greed index is a metric that measures the sentiment of Bitcoin markets. Seven separate indicators are rated in the fear and greed index to determine how much fear and greed are present in the market. It calculates a simple number by assessing emotions and thoughts from many sources. Volatility, market momentum, volume, social media, dominance, and trends are all used to calculate the index score.
The index has been substantially moving towards the side of worry since the Bitcoin fall on May 19, which destroyed the entire crypto market.
Another Tool in Your Toolbox
Understanding the market’s heartbeat and how investors are feeling can be a superpower for savvy investors. However, before jumping to make an investment decision, it’s worth noting that analysts have found that the CNN Money fear and greed index doesn’t have predictive power when it comes to investment. A strategy that relies exclusively on the F&GI, selling when the market displays extreme greed and buying when it shows intense fear, won’t necessarily beat the market. That being said, the fear and greed index can be a helpful metric for determining whether the stock market is cheap or overpriced and can be a powerful tool in your toolbox.
When it comes to Bitcoin, sentiment plays a more significant role in its price movements than the S&P500. A large chunk of Bitcoin’s value stems from the extent to which it is adopted by a cross-section of miners, companies, countries, traders, and hodlers, each of which bring their own set of emotions to the table. Knowing how everyone in the market is feeling is thus essential to understanding where we are in the Bitcoin market cycle.