If you really want to become a successful crypto trader, putting in real-time hard work to understand the world of cryptocurrency is the main prerequisite, But, this ride is full of ups and downs and not so straightforward. Given the current market scenario, cryptocurrencies at large are depicting “extreme fear” in the market.
So, with so much of a negative sentiment around should you make an exit, or, is it a great opportunity to “buy the dip”? Should you hold or exit partially from the crypto markets? What should be your next move? These are the kind of questions which have been running in the mind of crypto enthusiasts since a very long time.
Here, comes the major role of the Fear and Greed Index. The Fear and Greed Index can be referred to as a metric or an indicator which helps to gauge crypto market movements and market sentiment and thus provide useful insights to the crypto investors, who might be just sitting clueless, thinking what is going to happen next.
Let’s dig into this article which explains in detail how investor’s sentiments can affect the crypto market and how the Fear and Greed Index assists the traders to make the much informed decision or fine-tune their strategies related to their crypto investments.
Understanding the Concept Of Fear And Greed Index In Crypto Markets
Cryptocurrency markets are highly influenced by the emotions of buyers and sellers who trade actively in the market, which means one negative news can play a spoilsport or one good news can take markets to its new all-time high.
The sentiments of buyers and sellers highly impact and influence cryptocurrency markets which further leads to a “Fear” and “Greed” kind of situation. Such sentiments in the market are triggered due to multiple reasons.
For instance, the “Fear of missing out” or “FOMO”, happens when large corporations turn their attention to Bitcoin and which tempts the other retail participants in the market to rash actions. So, if people are bullish or behave in the same way under certain conditions, it also becomes a huge possibility to make profits or take the positions accordingly.
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This is where the Fear and Greed Index for crypto comes into the picture. The main aim of this index is to gauge the market sentiments of crypto traders at a given time and help the traders to identify the next move. It is to be noted that the Fear and Greed Index does not react firmly to long-term bull runs, rather, it reacts to the current worldwide news events and short-term changes in the crypto market.
In short, it helps the traders to analyze the market conditions and thus make informed decisions. The Fear and Greed Index for crypto is entirely based on strong data and detailed analysis. As erroneous data can lead to faulty decisions and result in waste of energy and resources.
For instance, a basic knowledge of certain market events and reactions is necessary in order to assess the effects of certain events. The weighting of specific factors also plays an important role in your analysis.
Key Features of Fear And Greed Index
- Measures the market sentiment of the crypto participants.
- Uses several metrics such as volatility, market momentum, volume, and very importantly the social media sentiment.
- Analyze market sentiments in the state of high fear or extreme greed.
- Helps crypto market participants with informed decisions.
- Index is measured on a yearly, monthly, daily and weekly basis.
How Fear and Greed Index Works In The Crypto Markets?
The Fear and Greed Index is an analytical indicator which generates the number between 0 to 100, where value of 1 indicates the state of extreme fear in the cryptocurrency market, which implies that the traders in the market are selling. Whereas, a value of 100 denotes that the market is going through an extreme level of greed which implies that traders in the market are in mood to buy more.
The index follows a simple rule of thumb: when the market goes up, people tend to accumulate more cryptos, which means that they become greedier and this phenomenon leads to much higher price movements. In the same way, when the crypto market crashes, traders start to sell their positions and this leads to panic selling and thus it reflects a bearish direction.
This is how the Fear and Greed Index is measured:
For instance, the Feed and Greed Index is able to depict how Bitcoin sentiment has changed over the given time. The index generally will sit in the greed range or drop into extreme fear when any negative news will burst into the crypto world. The indicator also depicts how sentiments are directly related to major news events over the past few years.
Fear And Greed Index for Crypto In January 2023
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(As on January 9, 2023)
What Factors Affect “Fear” and “Greed” in Crypto Markets?
Generally, the Fear and Greed Index in crypto markets are based on following metrics:
Volatility: The higher the volatility, the higher is the fear. Extreme fluctuations in the prices of cryptocurrencies depicts an anxious market and low appetite for investors. The index measures the volatility and then compares it to the average of the last one month or 90 days.
Volume: Higher buy volumes means more greed in the market. So, the greater the volume in crypto, the more traders are participating. Index measures the current volume using the averages of the last 30 or 90 days.
Social Media: Crypto-based information is extremely time sensitive, and the different social media channels often play a huge role. Social media platforms such as “Twitter” have a huge influence on crypto markets.
Rather, one tweet can crash the whole market or set the mood of the market. It almost carries 15% of weightage in the Fear and Greed index. The index generally tracks hashtags and mentions and then compares them to historical averages.
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Surveys: Opinions of users and investors also matters the most and plays a huge role in affecting the price of cryptocurrencies. The more positive surveys accelerate the index higher and create the greed kind of situation in the market.
Dominance: We know that Bitcoin is the poster boy of crypto markets. Thus, to gauge the overall sentiment of the crypto market, the Fear and Greed index measures the dominance of Bitcoin in the entire market. The greater the dominance, the more fearful the market is and lesser the Bitcoin’s dominance, the greedier the market is likely to become.
Google Search Trends: The Fear and Greed Index also takes google search trends in the final value. The more the search interest in crypto means, the more greed likely to be seen in the market. For instance, increases in Google BTC searches have coincided with dramatic volatility in crypto prices.
DYOR Before You Invest in Cryptocurrencies
DYOR is short for “Do Your Own Research”, which is a very common term used by the cryptocurrency enthusiasts. It encourages traders to do proper research and do due diligence before investing in any sort of cryptocurrency.
The Fear and Greed Index might help you to some extent, but there is always some or the other risk associated with the cryptocurrencies. Thus, it is crucial for crypto traders and enthusiasts to do their DYOR before putting their money into highly volatile and unpredictable cryptocurrencies.
Undoubtedly, the cryptocurrency market has been bearish since the 2022-end and the biggest coins such as BTC, XRP, ETH, SOL have continued to slumped to double digits losses amid the concerns of FTX fallout, inflation and liquidity uncertainties.
To tackle this kind of situation, where the market is experiencing prolonged bearish trends, the Fear and Greed Index can be of immense help to gauge the sentiment of the wider crypto market and predict the future movements with actionable insights.
This can also further help potential crypto investors and enthusiasts to avoid an overreaction, which could otherwise lead to panic-selling or may create a blood-bath kind of situation in an already crippled crypto market.