The emotions of the market decide how it is going to perform majorly, and it is evident that fear and Greed are two of the primary emotions that compound into the rise and fall of the market. People tend to buy Bitcoins and other cryptocurrencies based on their emotions. When the masses face fear, the market tends to crash.
When the investors that make up the market feel greedy regarding a certain cryptocurrency, their price seems to spike up. The fear and greed index was devised by CNNMoney, and it gauges seven indicators, including junk bond demand, market volatility, market momentum, safe-haven demand, pick and call options, stock price strength, and breadth.
If you are into crypto trading, you may consider visiting https://www.bitalpha-ai.io for more information about Bitcoin trading.
What are the Fear and Greed Index?
The fear and greed index can help investors escape the consequences of overreacting to their own emotions. The above-mentioned index measures the sentiments and emotions related to Bitcoins and other large-cap currencies on the basis of observations from various sources.
It can be stated that people usually give in to Greed when the market is doing positive numbers, which results in fear of Missing Out on people, because of which, they start making irrational choices.
Similarly, when the market is mostly red, people fear losing a big portion of their investments and start selling hastily. This leads to panicked dumping of cryptocurrencies, which further lowers their value.
How the Greed and Fear Index Works
The fear and greed index is measured in a range of 0-100. In this range, lower scores imply the presence of fear in the market, while a higher score implies that investors are greedy in the market right now. A score between 0 to 24 would imply the presence of extreme fear, while a score between 25 and 49 means that there is moderate fear among crypto traders.
50 reads a neutral emotion in the market, while a score between 51 and 75 implies normal Greed. However, a score between 75 and 100 on the fear and greed index would signify extreme Greed among traders in the market, which is characterized by high prices of Bitcoins and other cryptocurrencies. When there is extreme fear in the market, traders tend to sell their holdings, which further drives down their prices.
This is a good time to buy, and this move is referred to as buying the dip. However, when the market is dominated by extreme Greed, FOMO among the masses can be leveraged by selling cryptocurrencies at a high rate.
What Does the Fear and Greed Index Gauge?
It must be kept in mind that it only measures the sentiments for Bitcoin in the market, even though its name suggests that it covers the whole market. The five components of the Fear & Greed index include:
Volatility, which accounts for 25% of the whole index, The index utilizes volatility as
- A surrogate attribute for fear in the market. Volatility is measured by comparing the current price of Bitcoin with the average prices for 30-90 days.
- The market volume/momentum marks the other 25% of the index, and it considers the current trading volume in the market, which is compared with the 30 and 90-day averages of Bitcoin trading volume. It takes the place of too much Greed or bullishness within the market.
- Social media makes up another 15% of the index, and it focuses on Bitcoin-related hashtags on Twitter, as well as the number and speed of interactions. Higher speed and interaction than normal suggests greedy behavior within the market.
- Dominance makes up another 10% of the index and represents the share of Bitcoins in the crypto market. Increasing Dominance implies that funds are being allocated from altcoins towards Bitcoins, which means that the masses view Bitcoins as a safe haven for crypto investors. Lower Dominance implies that investors are taking risks by deviating away from Bitcoin into riskier altcoins!
- Trends make up 10% of the remaining index, and it is assimilated on the basis of crunched-down Google Trend Data related to Bitcoin-related searches.
The Fear and Greed Index for Bitcoin represents the common sentiment of the market regarding Bitcoin. A higher score on the index implies that there is Greed in the market, and it is suggested that you sell off your Bitcoins at the highest point of Greed and buy at the lowest point on the index, which signifies fear.