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Summary
The index sets a score range of 0 to 100 for cryptocurrency market sentiment. It analyzes the stock market based on the Fear and Greed Index built by CNNMoney.
Fear (0 to 49 points) indicates that the market is undervalued and in a state of oversupply. Greed (a score of 50 to 100) indicates that the cryptocurrency is overvalued and may be in a bubble.
You can incorporate changing levels of fear and greed into your trading strategy when deciding to enter or exit the cryptocurrency market.
Introduction
When deciding to buy or sell in the cryptocurrency market, good traders or Investors will always look for supporting data. Look at charts, analyze fundamentals, and tap into market sentiment—it’s smart to look for evidence from multiple sources. However, studying all the current indicators and indexes can take a lot of time. Through the "Cryptocurrency Fear and Greed Index", a combination of sentiment and fundamental indicators, we can understand the fear and greed in the market. While it cannot be relied upon as the only basis, this indicator does help to understand the overall feeling of the cryptocurrency market.
What is index?
In the traditional sense, an index takes many data points and combines them into a single statistical measure. You may have heard of the Dow Jones Industrial Average (DJIA), a well-known index that tracks the stock market. The index is a price-weighted combination of 30 large companies listed on numerous U.S. stock exchanges. Traders and investors can invest in the stocks of these companies in a comprehensive way by purchasing the Dow.
The Crypto Fear and Greed Index is also a weighted indicator of market data, but the similarities end there. The Crypto Fear and Greed Index cannot be purchased and is not part of any financial instrument, it is simply a market indicator that can be used as a supplementary analysis.
What are market indicators?
Market indicators help traders and investors analyze market data more easily. Whether it is technical analysis, fundamental analysis or sentiment analysis, all forms of market analysis involve indicators. If you've tried technical analysis (TA), you probably already know something about indicators. These indicators range from simple moving averages to complex Ichimoku equilibrium charts and are all techniques of technical analysis. Technical analysis indicators typically analyze price, volume, and other statistical trends.
Fundamental analysis indicators take a different approach. When you research a certain token or stock, you are actually trying to determine the fundamental value of the project. For example, your research could combine number of users and total market value into the same metric.
In addition, we measure how investors and traders are feeling and thinking with our Market Sentiment Indicator. The Crypto Fear and Greed Index is just one of many indices. Other indices include bullish and bearish indices launched by Augmento and WhaleAlert to track the large-scale transfers of whales in the cryptocurrency market. To some extent, cryptocurrency research relies heavily on analysis of social media, communities, and public opinion. Therefore, sentiment analysis can find a place in such assets.
What exactly is the Fear and Greed Index?
CNNMoney originally created the Fear and Greed Index with the goal of analyzing market sentiment for stocks and shares. Since then, Alternative.me has customized its own version specifically for the cryptocurrency market.
The Crypto Fear and Greed Index analyzes a range of different trends and market indicators to determine whether market participants are feeling greedy or fearful. A score of 0 represents extreme fear, and a score of 100 represents extreme greed. A score of 50 means the market is nearly neutral.
Fearful markets may indicate that cryptocurrencies are undervalued. If fear runs rampant in the market, it could trigger excessive selling and excessive panic. Fear does not necessarily indicate that the market is in a long-term bearish trend. Instead, you can think of it as a short- to medium-term reference for overall market sentiment.
Greed in the market is just the opposite. If investor and trader greed runs high, it could lead to overvaluation and bubbles. Imagine a situation: Due to the FOMO (fear of missing out) mentality, investors blindly push up the market, causing the price of Bitcoin to be overvalued. In other words, increased greed can lead to excess demand, artificially inflating prices.
How does the Cryptocurrency Fear and Greed Index work?
Alternate.me calculates new values every day, between 0 and 100. As of July 2021, the Crypto Fear and Greed Index only considers information related to Bitcoin. The reason behind this is that Bitcoin is highly correlated with the overall cryptocurrency market in terms of price and sentiment. Other large coins are expected to join the mix in the future, most likely including Ethereum (ETH) and Binance Coin.
You can scale the index into the following levels:
- 0- 24: Extreme Fear (Orange)
- 25-49: Fear (Amber/Yellow)
- 50-74: Greed (Light Green)
- 75- 100: Extreme Greed (Green)
The index combines five different weighted market factors to calculate a specific value. The specific introduction is as follows:
1.Volatility (accounting for 25% of the index). Volatility measures Bitcoin’s current value based on averages over the past 30 and 90 days. The index uses volatility as a proxy for market uncertainty.
2. Market momentum/volume (accounting for 25% of the index). Bitcoin’s current volume and market momentum are compared to the previous 30-day and 90-day averages and then combined. Sustained heavy buying indicates positive or greedy market sentiment.
3. Social media (15% of the index). This factor focuses on the number of Bitcoin-related Twitter hashtags, specifically the interaction rate. In general, persistent and unusually frequent interactions are more closely associated with market greed than with fear.
4. Bitcoin dominance (10% of the index). This metric is used to measure Bitcoin’s market dominance. Increased market dominance indicates new investment in Bitcoin and a possible reallocation of funds from altcoins.
5. Google Trends (10% of the index). The index looks at Google Trends data for Bitcoin-related search queries, providing insights into market sentiment. For example, an increase in searches for "bitcoin scam" indicates greater fear in the market.
6. Survey results (15% of index score). Currently, this factor has been disabled for some time.
Why does the Cryptocurrency Fear and Greed Index work?
The Cryptocurrency Fear and Greed Index can be an important tool for understanding changes in market sentiment. Large moves can create opportunities to enter or exit the market before the rest of the investors follow the trend. In the following, we will give a simple example to analyze the relationship between the total market capitalization of cryptocurrency and the index value in the past three months.
Point 1 shows that a round of sharp fluctuations ended on April 26, 2021, and the index value dropped from 73 (greedy) to 27 (fear). Point 2 shows that a new round of decline began on May 12, 2021, with the index value falling from 68 (greed) to 26 (fear). Comparing the above changes to the overall market capitalization of cryptocurrencies, we can tell whether this matches the cryptocurrency market.
Point 1 shows a starting value of $1.78 trillion on April 26 before climbing on May 12 to a peak of $2.53 trillion. If we combine this move with the above, we can see a large swing in sentiment from greed to fear, coinciding with a local bottom in the cryptocurrency market capitalization. As the market becomes increasingly greedy, the overall market value will continue to rise, eventually reaching its highest point. After reaching the highest point, the mood plummeted again.
As the above examples demonstrate, the index can be useful in finding buying opportunities and predicting market selloffs. Based on this index, you can tell whether your emotional reaction is excessive or in line with the market. So, does it work in all situations? The answer is probably no.
Can I use this index for long-term analysis?
No, this indicator cannot be used for long-term analysis of cryptocurrency market cycles. In a bull or bear market, cycles of fear and greed alternate, and this transition makes swing traders profitable. However, for investors looking to hold for the long term, the index alone is difficult to predict the transition from a bull market to a bear market. They still need to analyze other market factors and draw a long-term view.
As always, you should conduct a comprehensive analysis and judgment and do not rely solely on one indicator or analysis method. Before making any investment, please be sure to do your own research (DYOR), invest rationally, and act within your capabilities.
Summary
The Cryptocurrency Fear and Greed Index is collected and summarized A simple approach to a range of fundamental and market sentiment indicators. This metric lets you track social media, Google Trends, and other statistics without having to do it yourself. If you include it in your analysis, combine it with other indicators and indexes to get a more balanced and comprehensive insight.