Do you ever think about why the cryptocurrency market is so volatile? Well, one of the main reasons behind it is people’s emotions. Most of the time, investor’s emotions drive the market. When they see the market doing good, they keep investing more and more money, leading to a strong bullish atmosphere. Similarly, when they know the market is moving downward, they panic and liquidate their investments, leading to sharp falls.
In this article, we have covered questions about the Bitcoin fear and greed index and how to measure it. Having awareness of the fear and greed index will be beneficial for you to control your emotions.
Let’s get started!
What Is the Fear and Greed Index?
The crypto fear and greed index is a measurement that assigns a score to crypto market sentiment ranging from 0 to 100. The fear and greed index was designed by CNNMoney (a popular financial news and information website) to evaluate market emotion for equities and shares. Since then, Alternative.me (a popular software comparison website) has customized its version for the cryptocurrency market.
Fear (a score of 0 to 49) suggests that the market is undervalued and oversupplied. Greed (a score of 50 to 100) indicates that cryptocurrencies are overvalued and may be amid a bubble.
When deciding whether to enter or depart the crypto market, seeing fluctuations in the amount of fear and greed might become part of your trading strategy.
How Does the Fear and Greed Index Work?
The index shows a value based on various market trends and indicators. Currently, it uses only the information related to Bitcoin (BTC). They’re just using Bitcoin data because of its biggest market capitalization and sentiment correlation with the rest of the market. There are discussions to include other significant cryptos such as Ethereum (ETH) and Cardano (ADA). Index readings are divided into four major parts.
- Extreme Fear: 0 – 25
- Fear: 26 – 50
- Greed: 51 – 75
- Extreme Greed: 76 – 100
Extreme fear is a symptom that investors are very concerned about their assets’ value decreasing. The tremendous panic among investors, on the other hand, could indicate a buying opportunity. Similarly, when investors are overly greedy, the market is due for a correction.
How Is the Crypto Fear and Greed Index Measured?
The data come from the crypto fear and greed index, which combines five major market elements. To illustrate significant progress in the crypto market’s attitude change, each data point is valued the same as the day before.
Volatility accounts for 25% of the index. It is calculated by comparing Bitcoin’s current price with the averages of the last 30 days and 90 days. Volatility reflects the fear in the market. When volatility rises sharply, it could suggest that the market is afraid.
The other biggie is market momentum/volume, which accounts for 25% of the Bitcoin fear and greed index. This method compares Bitcoin’s current trading volume and momentum against 30- and 90-day averages, then adds the findings. This is often used to describe excessive bullishness or greed in the market.
Social media accounts for 15% of the index. In calculating the crypto fear and greed index, the social media aspect is quite crucial. The social media indicator is based on sentiment analysis of likes, postings, the number of tweets tagged with specific hashtags (most notably #Bitcoin), and how users tweet with that hashtag.
Greedy market conduct is associated with a higher-than-normal interaction rate. They are also working on including Reddit in this.
Dominance receives 10% of the index. The market cap share of the entire crypto market mirrors a coin’s dominance. The surge in Bitcoin supremacy is primarily due to a fear of investing in more dangerous alt-coins, as Bitcoin is increasingly becoming the safe haven of crypto.
On the other hand, as Bitcoin’s dominance declines, people get more greedy, investing in more risky alt-coins in the hope of profiting from the next great bull run. In any case, studying dominance for a coin other than Bitcoin could lead to the opposite conclusion since increased interest in an alt-coin could indicate bullish/greedy behavior for that coin.
Trends cover 10% of the Bitcoin greed and fear index. The emotional behavior of the market can be deduced from Google trends data for Bitcoin-related searches. If the number of searches for “Bitcoin as legal tender” rises, this indicates market greed. This provides a broad indication of how many people are interested in a particular asset.
You should notice all these five indicators cover only 85% of the index. Surveys have completed the missing part.
Surveys impact 15% of the index. However, this component is not currently taken into account when calculating the crypto fear and greed index. Surveys use straw polls (a public pooling platform) to conduct weekly cryptocurrency polls and ask people how they see the market.
Typically, each poll will receive between 2,500 and 3,500 votes, giving a good idea of how a group of crypto investors feels. Don’t pay too much heed to its outcomes, but they were helpful at one point. There are no particular reasons for why this is paused and how the distribution is updated in the survey’s absence.
Conclusion: Crypto Fear and Greed Index
The Bitcoin fear and greed index is a quick and easy approach to compile and summarize various fundamentals and market sentiment indicators. If you want to calculate it, you must rely on multiple indicators, including Bitcoin dominance, trends, volatility, volume, social media, and many others. This index provides the value by dividing equal portions for each indicator according to its importance. It helps you control your emotions and make better decisions regarding the crypto market.