Before the pandemic, people jumped around the exchange bourses and on the streets gauging the price movements of stocks, bonds, commodities. Now, most of the places are half-empty or almost deserted. But people are staying at their homes punching keyboards and sometimes thrilled with the ups and downs of digital markets, including the cryptocurrency markets before computers.
Crypto investing has a history of more than a decade but is still a new field compared to other investment tools. Until recent times, the crypto fear and greed index was available to make crypto investing manageable. It provides a venue to understand the market mood and clues to investors about the digital currency price movements.
Developed by alternative.me, the index is distinct from others. It is not about the asset prices but an indicator of market sentiment and attitude. In the following, you should know more about the crypto fear and greed index if you intend to invest in cryptocurrencies.
What is the Crypto Fear and Greed Index?
Initially developed for bitcoins, the index still applies to other cryptocurrencies. It now serves as a market’s sentiment thermometer measuring investors’ net fears and thrills at a specified time. When fears outweigh thrills or excitement, the market is full of fear more than exciting sentiments. The contrary is vice versa.
The index comprises 6 factors in creating the fear and greed index(FGI). Before knowing the factors influencing the index, you should realize 3 fundamental drivers bearing on cryptocurrencies’ prices overall beforehand.
1. Macroeconomic conditions: Economics, elections, wars and natural disasters, and pandemics impact the market and prices.
2. Market: The fundamentals of demands and supplies determine an optimal price level of a good at a time. People’s behavior determines market movements and can be unpredictable.
3. Sentiment: Economists say people don’t always make decisions on rational thinking. They buy or sell based on fearful or happy feelings rather than a well-calculated conclusion.
How do you read the Crypto Fear and Greed Index?
Like other indexes, the FGI uses a scale of 1 to 100 to measure the market sentiment. A score below 50 indicates a market is in a fear mode where people are panicking about buying.
When the score reaches 0, it is an extreme fear mood where people are ditching cryptos, and some investors may think it’s time to buy.
When the index climbs up past 50, it is in a FOMO mode(fear of missing out). People are highly greedy and scramble to buy at around 100 whereas some suggest selling otherwise.
The neutral mode is 50, where the market is calm, and the buy-and-sell activities are equal.
What makes up the Crypto Fear and Greed Index?
The 6 elements make the FGI have different weight proportions according to their influences. Higher proportions in the weight mean serious effects on people’s behavior. Total elements include market momentum(25%), volatility(25%), surveys(15%), social media(15%), search trends(10%), dominance(10%)
1. Market momentum/volume: The indicator measures bitcoin’s trading volumes over the last 30 days and 90 days. High selling trading activities drag the sentiment into the lower end of fear while high buying volumes lift into the greedier level.
2. Volatility: It compares a bitcoin’s current value to corresponding average values over the last 30 days and the last 90 days. The more significant the gap between the indicators is, the more fearful the index goes.
3. Surveys: The barometer looks at how investors feel by extracting direct responses from 2,000 to 3,000 respondents. A sample size like this is statistically sufficient to represent the market mood. But the survey activity has halted for some time, and no apparent information is available as to when it starts again.
4. Social media: The gauge examines how often people discuss bitcoins and the number of statements online. An intense rise in the topic pulls up the index even though the sentiment is negative.
5. Search trends: The search trends for bitcoin are a yardstick for probing the current market attitude towards cryptocurrencies. 2 indicators guide fear and greed modes. The first is search volume. More searches point to more volatile the index. Secondly, it is positive or negative searches. More positive searches concerning bitcoins push the index towards positive territory. The reverse is the vice visa.
6. Dominance: The measure assesses bitcoin’s market share against other cryptocurrencies. If the bitcoin market share is higher, investors avoid other cryptos by putting their money back in a haven. The index may go down below 50. If bitcoin cannot dominate the crypto market, investors place higher bets on smaller cryptos and pull up the index to a greedier level.
How can you make money when you are dealing with the Crypto Fear and Greed Index(FGI)?
The Crypto FGI is an integrated indicator of investors’ sentiment reflecting on the bitcoin prices at a specified time. When it reaches a fear level of below 50, bearish investors ditching assets outnumber bullish buying investors. The 0 level represents the panic mode, in which people may react hysterically. Optimistic investors may interpret it as a buoyant market ahead and a buying opportunity.
In the same way, pessimistic investors think it is a bearish signal when the index reaches a level of more than 50 or an extreme greed level of fear-of-missing-out(FOMO) atmosphere prevails in the market. An exit strategy is a way out.
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Does the Crypto Fear and Greed Index work?
The index is a proportion-weighted scoreboard reflecting current trends and moods on bitcoins. You should not see it as an accurate guidepost for the future performance of all cryptos.
Besides, momentum and volatility form half of the index composition. Short-term traders are more oriented toward the index value than long-term investors. The index may suit temporary traders looking for profits by capitalizing on fluid market sentiments.
Is the Fear and Greed Index a better Predictor of Bitcoin prices in the future?
Indexes are not a perfect predictor for future performance as they reflect past results. The future may not follow the past and the present. The cryptocurrency industry is in an early stage and subject to more changes than others, like the stock market.
The regulatory environment for cryptos is ever rapidly changing. The Monetary Authority of Singapore has published guidelines for cryptocurrency trading and investing, limiting digital asset promotions and taking actions by prohibiting “Binance” operations in the local market.
The Government does not treat it as a legal currency until now. As a crypto investor, you should also watch the US regulatory development regarding the digital currency market. The US Government is exploring a government-backed digital currency even though it is in an early stage.
Does it make you a good trade if you know how to manage the Fear and Greed Index?
Knowing when to profit from gauging the index is a perfect investing skill. But, like other investment indexes, you may not ride to victory each time by grabbing the market mood and sentiment because of unpredictable factors prevalent over the market.
Investors may profit from an unregulated and size-small market by creating a trend on the internet world like social media. That may increase and pull google trends data relating to crypto prices. Investors should do more research and study before making any decision.
Final Thoughts
The Crypto Fear and Greed Index is a valuable indicator providing valuable information for short-term investors. However, it isn’t an accurate guide to further performance as future developments do not necessarily follow the past. Besides, You should monitor regulatory changes regarding the industry and do research on your investment.
Key Takeaways
- The FGI is a weighted measure of market mood and sentiment.
- It comprises market momentum, volatility, surveys, social media, search trends, and dominance.
- The index has a scale of 1 to 100, whereas 1 is an extreme fear mode, and 100 is extreme greed.
- Investors may refer to the index but not the only source in making investment decisions.
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