There are a variety of metrics and gauges that are used by investment professionals when making decisions. Often, these are various trading indicators such as the Relative Strength Index (RSI) or various moving averages. But, one metric that is especially important when looking into investing into digital assets such as Bitcoin is the crypto fear and greed index.
The crypto fear and greed index is essentially a tool that gauges the overall market sentiment towards cryptocurrencies and is displayed as a range from 0-100. When the fear and greed index is between 0-25, the market is in extreme fear. Whereas if it’s between 75-100 the market is in extreme greed. The ranges in between those two extremes are then more neutral to slight fear or greed depending on which way the needle points that day.
Factors of the Crypto Fear and Greed Index
There are generally about five factors which platforms use to calculate their fear and greed index measure, with most platforms also having some sort of proprietary measure that they use as well. The five general factors that are used to calculate crypto fear and greed are:
Volatility
The more volatile an asset’s price movements are, the more fear there will be tied to an asset. Bitcoin going up and down in price by large swings are a good example of fear based price movements, whereas if it was mostly just going up, it would indicate greed.
The volatility is often factored over 30 and 90 day time periods to create more accurate averages of volatility.
Market Momentum/Volume
Market momentum and volume are tied in with volatility as well, but this is more focused around top performing assets. If assets are seeing lots of buying volume and open interest, then it is a greedy atmosphere.
Conversely, if there isn’t much trading volume for an asset then it is likely more of a fear-based atmosphere.
Bitcoin Dominance
The more that Bitcoin dominates the market, the more likely that there is fear in it. This is because Bitcoin is the least risky crypto asset, so when the market is being greedy, money moves out of Bitcoin and into riskier altcoins which could see higher percentage gains.
Conversely, when the market is fearful, they sell their altcoins and move into Bitcoin, increasing the Bitcoin dominance in the market.
Google Trends/Public Sentiment
Data about search queries regarding Bitcoin can be a good indication of the general atmosphere in the market. For example, if a growing number of searches include fearful things such as “Bitcoin price manipulation,” then the market may be in a fearful state. On the other hand, if there are more searches for “How to buy crypto” than usual, the market may be headed for greed.
Mentions on social media are also useful things to measure, as more frequent mentions are likely to indicate positive momentum/greed whereas a lack of any mentions is likely to be tied to fear.
Open Interest/Derivatives Markets
The index uses open interest data on Bitcoin and Ethereum derivatives contracts to indicate investor sentiment over a time frame of 1 to a few months. The higher the ratio of puts to calls, the more bearish expectations are, indicating fear. The lower the ratio, the
Traders, analysts, and investors use open interest to assess market sentiment and to gauge the liquidity and overall interest in cryptocurrency derivatives. It is important to understand that open interest is not the same as trading volume. Open interest represents the total number of contracts that are still active and have not been offset by an opposite trade, whereas trading volume is the number of contracts traded during a period.
How to Use It for Investing
The crypto fear and greed index should be used as just another metric when assessing investment decisions. If you’re interested in making an investment into a crypto asset, then looking at the current fear and greed index measure should give you a good indication of whether you are buying at the right time.
For example, if you’re buying when the market is in fear, then the prices are likely lower than when the market is in greed. This means that you can take advantage of negative sentiment to make more gains when sentiment flips the other way and the price rebounds.
Similarly, if the market is in extreme greed, it may be a good idea to wait before buying in, as the asset could be overvalued.
Is it a Good Tool When Making Investment Decisions?
Though you can certainly use the crypto fear and greed index to help you make your investment decisions, it shouldn’t be the only one you use. It mostly works as a sentiment indicator to help you get a sense of the emotional biases of the overall market, and then make more objective decisions. This can be useful as an investment tool, but when combined with other analytical tools, the fear and greed index becomes a more valuable resource for gauging market sentiment and making informed choices.
As with most investing, due diligence remains the key.
Closing Thoughts
Investing in cryptocurrencies or traditional investment vehicles is never something that should be done haphazardly.
It’s important to do your research into the assets that you’re buying, but also just as important to take into account various metrics such as the fear and greed index. Doing so can help you make a more informed investment decision, and maximize the gains you can make in the market.
