What is the crypto fear and greed index? Find out in our comprehensive guide, covering all the essential details you need to know.
- How Does the Greed and Fear Index Work in Conventional Trading?
- What is the Fear and Greed Index in Crypto Trading?
- In summary
Have you heard of the crypto fear and greed index? If not, this guide offers an expert insight into what it means and why it matters.
Both fear and greed have the power to affect our decisions. And they can make us behave in strange, stupid, or even dangerous, ways.
When this happens to cryptocurrency traders (or even those conducting traditional trades), it’s easy for them to make mistakes. But the crypto greed and fear index helps traders measure the market’s levels of psychological instability, so you can identify the best times to buy or sell assets.
How Does the Greed and Fear Index Work in Conventional Trading?
Warren Buffet, one of the most prolific investors in the world, once reminded traders that “expenses” and “excitement” were their foes. He said that, if investors insisted on attempting to time their choices perfectly, they should “try to be fearful when others are greedy” and to take a greedy approach when others were acting fearful only.
It’s a bold statement, and certainly may have helped many traders contemplate their actions with a little more care. It’s true that both greed and fear have been staples in the market ever since the first exchange was created. Participants in the market may find both emotions are so natural, they could be considered just another aspect of behavioral economics.
What is behavioral economics? It refers to the study of those factors influencing economic decisions, covering emotions, psychology, and other crucial areas.
With this in mind, CNN Money created a fear and greed index for traditional trading markets, featuring the following indicators:
Stock Price Breadth: the volume of rising shares trading in stocks versus those in decline
Stock Price Momentum: the S&P 500 versus its moving average across 125 days
Safe Haven Demand: the contrast in returns for stocks versus treasuries
Put and Call Options: refers to the put/call ratio, comparing the trading volume of bullish call options in relation to bearish put options’ trading volumes
Stock Price Strength: the volume of stocks hitting their highest and lowest point in 52 weeks (according to the New York Stock Exchange)
Market Volatility: the VIX, measuring volatility
Junk Bond Demand: the spread between yields on junk bonds and investment grade bonds
These indicators incorporate scales running from zero to 100, on which:
- Zero to 49 indicates fear
- 51 to 100 demonstrates greed in investors
- 50 is neutral
Computers take an equal-weighted average across these indicators to calculate the greed and fear index.
CNN Business claims that excessive fear has the power to send stocks plummeting far below their intrinsic worth, and when greed strikes investors, they’re capable of bidding stock prices up far beyond the proper value.
As a result, some traders view a very low reading level of the fear and greed index to be a solid buying opportunity. However, a high reading level can indicate that it’s the proper momentum to sell, aligning with Buffet’s aforementioned idea.
What is the Fear and Greed Index in Crypto Trading?
So, now we’ve established what the traditional trading fear and greed index is, let’s explore the crypto greed and fear index.
A Bitcoin fear and greed index, created by the Alternative.me platform, is used to analyze emotions and sentiments from various sources before crunching them into a number. As with traditional trading markets, the crypto greed and fear index ranges from zero to 100, indicating when investors may be too greedy or fearful.
When crypto investors are fearful, it’s a good opportunity to purchase from them, and when they’re greedy, it might be best to sell as the market’s due for a correction.
The team behind the crypto fear and greed index claims the aim is to protect investors from overreacting because of their emotional responses. If you want an idea of the crypto market’s overall sentiment, that website is worth a look.
The index’s developers consider the following factors when calculating numbers:
Market volume: greed levels rise as buying volumes undergo significant growth
Volatility: broader fluctuations are taken as an indicator of fear
Dominance: as Bitcoin’s dominance increases, this is viewed as an indication of a growing greed level; when dominance reduces, investors are scared to put their money into Bitcoin
Trends: Google Trends data relating to numerous Bitcoin-focused search queries is gathered (such as search volume changes) and crunched
Social media: posts on specific hashtags are monitored, collated, and counted to track the number of interactions they gain across specific periods
While the fear and greed indices may appear similar across traditional and cryptocurrency markets, they’re fundamentally different.
The main difference is the markets they’re built for. The traditional fear and greed index encompasses well-established markets and incorporates parameters which can’t be applied to the index showing sentiment towards Bitcoin.
For instance, it’s inappropriate to consider the stock price breadth indicator — this applies to the volume of manifold shares trading in stocks, in contrast to the crypto greed and fear index.
Another key difference is Bitcoin’s high volatility, which is why technical indicators must be used alongside others. One effective illustration is a social media hustle: Google trends or Bitcoin’s dominance rates. In other words, if you developed traditional or crypto fear and greed indexes, what factors would you keep in mind when assessing markets?
Remember, though, that everything other people make can’t be regarded as the absolute truth. The more time you’ve spent trading, the more indicators you might have used, and the less satisfied you’ll likely be with the solutions available currently.
To summarize: the services available at the time of writing this offer just another view on the state of the market rather than the all-encompassing, definitive truth. Still, it’s better to have any index than none at all, right?