On January 15th, 2023, after nine months of “fear”, Bitcoin marked a neutral position, reaching a score of 52 on the Fear and Greed Index. The move made the news all over the finance media outlets and gave the crypto community a much more optimistic view on the near future, which, to be fair, felt like a breath of fresh air after almost a year-long Bear Market in the crypto sphere.
“Index what?”, you might ask yourself while reading that. If you’re struggling to get a grasp of why it matters, don’t worry. We will break down the basics, explaining what the Fear and Greed Index is, how it gets calculated and why keeping an eye on it can help your investments.
What is the Fear and Greed Index?
The Fear and Greed Index is a tool that helps assess the sentiment towards the current crypto market.
Investors can be emotional, especially when a large portion of their portfolio is at stake. The fear and greed index can open investors’ eyes to their own emotions and biases and help reevaluate a potentially impulsive decision.
On the other hand, the mood of the investors in the market has a real impact on where the market will move in the future, so knowing what others are up to allows investors to have a clearer view of their strategy.
How does the Index work?
The rule behind it is as simple as it looks: if the market goes up, people tend to accumulate crypto, prices get higher, that indicates a greedier sentiment.
The opposite occurs when the market crashes, people start liquidating their positions and the downturn movement creates the fear sentiment.
In the table below we broke down the spectrum into segments with the market sentiment values they indicate:
These values are measured daily and allow to track the yearly, monthly and weekly change.
How can you measure fear and greed?
To measure the market sentiment, experts use multiple metrics that include price volatility, market momentum, social media sentiment, Bitcoin dominance and search engine trends. Here’s a small note on each of these for your understanding:
Price volatility — An unusual rise in volatility compared to the value for the last 30 and 90 days is associated with a fearful market.
Market momentum — Consistently high buying volumes over a long period of time can be a sign of excessive greed, and vice versa.
Social media sentiment — The algorithms used to evaluate the sentiment of crypto investors in the social media count the posts and tweets mentioning the coin to measure the interest it receives from the public.
Bitcoin dominance — Going back to a safe haven of crypto such as Bitcoin, as opposed to higher-risk investments into altcoins, is usually a sign of fear in the market.
Search engine trends — The increase in search request volume can indicate a strong sentiment towards crypto. It’s also important to take into account if the search requests are actually positive or negative, as they can be as fearful as they can be greedy.
How can the Fear and Greed Index be an Investor’s ally?
As a market sentiment indicator, the purpose of the fear and greed index is to assist the crypto investor in finding the best moments to purchase and sell and, consequently, maximize profit and minimize potential risk. And there is no better way to reduce risk than to look at the market itself when making decisions. The index then proves itself as a powerful emotional management tool, giving you the means to detach yourself from general market reactions and reassess your current strategy.
Using psychology to identify the investors’ behavior patterns, the fear and greed index allows us to measure, quantify, understand and take advantage of the human psychology impacting the market.
Having the fear and greed index as an ally in your investment strategy, keeping a close eye on objective data and learning how to read the market can be a turning point on your journey to build a stronger portfolio. At the end of the day, maybe the secret behind a skilled, battle-trained trader is just the smarts to use the right tools in your favor!