Warren Buffett’s Fear & Greed Strategy: Does It Apply to Crypto Markets?—Analysis

• The most profitable market sentiment often defies expectations. The conventional wisdom surrounding fear and greed doesn’t always align with historical performance. Some phases produce stronger returns than others, though not necessarily for the reasons typically assumed.
• Not all assets adhere to the same principles. What works for Bitcoin doesn’t necessarily work for altcoins. Some cryptocurrencies thrive when others stall, and ignoring these differences can lead to costly mistakes.

Markets run on emotion. Fear drives individuals to sell at inopportune moments, often at a loss, while greed persuades them to buy when opportunities have already slipped away. The cycle repeats year after year, decade after decade.

Warren Buffett expressed this principle with remarkable clarity: “Be fearful when others are greedy and greedy when others are fearful,” he said. Baron Rothschild took it even further by stating, “The time to buy is when there’s blood in the streets.”

They built their wealth by doing the opposite of what the sentiment dictated. But is this contrarian approach truly effective over time?

In this edition of CCN Reports, we analyze the effectiveness of the Crypto Fear and Greed Index in timing the market: Can investors truly capitalize on opportunities by buying during periods of extreme fear and selling during extreme greed? We conducted a comprehensive analysis of historical Fear and Greed Index data from Alternative.me, spanning February 2018 to February 2025.

The Psychology of Fear and Greed in Markets

Behavioral finance has shown that human emotions, especially fear and greed, play a major role in investment decisions. According to Kahneman and Tversky’s (1979) Prospect Theory , individuals exhibit risk aversion when faced with sure gains and risk-seeking behavior when confronted with sure losses.
This translates into a pattern where investors prematurely secure profits out of fear and persist with losing positions in the hope of recovery, contrary to rational risk/reward behavior.

Herd mentality further amplifies these tendencies, as rising prices attract more investors, creating self-reinforcing cycles of speculation. Nobel laureate Robert Shiller described that a bubble is essentially “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion… bringing in a larger and larger class of investors.”

This feedback loop of greed can push asset prices far beyond their intrinsic value. Conversely, fear takes hold in downturns, creating a cascading effect where panic-driven selling triggers even more selling, amplifying market declines.

Cryptocurrency markets are no exception. In fact, they often exaggerate emotional swings even more dramatically. The Crypto Fear & Greed Index aims to measure these intense emotional extremes and potentially signal upcoming market reversals.

The Challenge of Timing the Market

Historically, timing the market has been notoriously challenging. Numerous studies show that even experienced investors often fail to consistently predict short-term price fluctuations with accuracy.

For example, Hurst, Ooi and Pedersen (2017) found that simple trend-following strategies performed well over long periods , but encountered frequent short-term whipsaws. Another paper by Fama and French (1988) suggested that although certain factors, such as momentum and valuations, can affect returns, accurately timing market cycles remains challenging due to inherent market noise and unpredictable events.

In essence, no indicator is infallible on its own, and market timing carries significant risk. Nonetheless, we examined whether the Fear and Greed Index provides an edge in understanding and navigating crypto market cycles. Does the adage “be greedy when others are fearful” hold true in this volatile landscape?

The Issue of Late Investment and Market Tops

Most investors still attempt to time the market but often join too late. By the time they gain the confidence to buy, the market has frequently already rallied by 50%, doubled, or even quintupled, leaving them purchasing at inflated prices near the peak.

Frazzini and Lamont (2008) found that retail investors tend to chase past performance , flocking to mutual funds that have recently delivered impressive returns. These inflows usually occur right before market peaks, leading to a pattern where stocks attracting substantial new investment subsequently underperform.

So, the “dumb money” rushes into the market when euphoria is high, only to face losses afterward. As downturns set in, panic selling becomes a common response among retail investors, locking in their losses. Thus, this emotional decision-making turns latecomers into bagholders.

Conversely, the most attractive buying opportunities often emerge when sentiment is at its lowest: Historical data consistently reveals that sentiment indicators are often inversely correlated with future returns. For example, Greenwood and Shleifer (2014) documented that during periods of extreme investor optimism, actual subsequent returns are significantly lower, and vice versa.

Similarly, studies such as “Investor Sentiment and the Cross-Section of Stock Returns” by Malcolm Baker and Jeffrey Wurgler (2006) , have observed that periods of excessive optimism are usually followed by weaker performance, whereas periods of extreme pessimism precede stronger returns​.

The crypto market exhibits similar patterns. Orăştean et al. (2024) noted that Google search volumes—an indicator of public interest—tend to spike during price rallies and then plummet when the bubble bursts. In other words, market chatter is at its loudest near the peak and fades into silence at the trough.

This dynamic makes sentiment a potential signal: Heightened greed frequently heralds declining returns, while extreme fear often signals a rebound on the horizon.

Looking at Historical Examples

It’s tempting to fantasize about how much one could have made by investing early in Bitcoin (BTC), Ethereum (ETH) or other top cryptocurrencies. However, the reality of those early accumulation phases was far from glamorous.

During these periods, markets were sluggish or in decline; pessimism dominated the discourse, and mainstream narratives often proclaimed the imminent demise of crypto. Only a few investors had the contrarian courage to seize the opportunity.

Take 2022 as an example: Following Bitcoin’s dramatic plunge to $15,000, the Crypto Fear & Greed Index registered “Extreme Fear.” The social media buzz surrounding crypto vanished, and trading activity dwindled to a crawl.

Yet, in hindsight, that period proved to be one of the best long-term buying opportunities—not just for Bitcoin but also for altcoins. A similar pattern occurred during the COVID-19 crash in March 2020 and again in the bear market in 2018.

Those who acted during peak despair reaped substantial rewards as the market rebounded in the following months. Conversely, periods marked by extreme greed aligned with market peaks, as seen in late 2017 and 2021, when the index soared to euphoric levels just before major price corrections.

Timing can be extremely counterintuitive. The moments when an asset appears most risky and out of favor have historically been the safest entry points, while the times when an asset feels like a “sure thing” have frequently marked the most perilous moments to buy.

Why Most Investors Fail To Buy at the Right Time

Why don’t more investors capitalize on those fearful market lows? The hesitation is largely psychological. During periods of extreme fear, the narrative surrounding the market turns negative: Headlines forecast further doom, influential figures either go silent or adopt bearish stances, and personal experiences of recent losses discourage taking on additional risks.

In such moments, it’s challenging for the average investor to recognize the asset’s long-term potential. Recent bias and loss aversion amplify the fear of further losses, making them feel more pressing than the prospect of future gains. As a result, even when valuations are highly attractive at the bottom, few have the resilience to buy when sentiment hits rock bottom.

Liquidity—or the lack of it—plays a significant role in bear markets. As sentiment wanes, trading volumes dry up. New capital inflows slow to a trickle, while potential buyers often find themselves either financially constrained or too fearful to invest. Empirical research by Mads Eberhardt has found that crypto market liquidity “falls off a cliff” during major downturns. For instance, after the end of the 2021 bull run, spot trading volumes on major exchanges plummeted by more than 80%.

Low liquidity means wider bid-ask spreads and slippage, which further discourages large investors from stepping in until volatility settles. Illiquidity can lead to prolonged price suppression, as the scarcity of buyers is insufficient to counterbalance the selling pressure until a capitulation event resets the market.

At the same time, savvy investors often take advantage of these fearful periods. Studies on market microstructure, e.g., De la Peña et al., 2022, demonstrate that institutional players and “whales” tend to quietly accumulate positions, while retail traders engage in panic-selling. In essence, smart money capitalizes on what the less experienced are hurriedly discarding.

Data from CryptoQuant underscores this pattern: When fear dominates the market, larger players buy as smaller ones sell—a classic scenario in which stronger hands profit from weaker hands.

Over time, the quiet accumulation by institutional investors often lays the groundwork for the next bull cycle, even when many average investors have exited the asset class, disillusioned by previous losses. It’s a cruel irony: Those with the patience and liquidity to invest during periods of shattered confidence are typically the ones who reap the greatest rewards when optimism eventually resurfaces.

Understanding the Fear and Greed Index

The Crypto Fear and Greed Index by Alternative.me is a sentiment analysis tool that aggregates various data points to measure market emotions on a scale from 0 to 100—where 0 represents “Extreme Fear” and 100 signifies “Extreme Greed.” It factors in several components, including:

• Volatility (25%): Measures Bitcoin’s short-term volatility and drawdowns compared to the 30-day and 90-day averages.
• Market Momentum & Trading Volume (25%): Tracks Bitcoin’s buying volume and momentum relative to recent averages.
• Social Media Activity (15%): Monitors crypto-related discussions, hashtags, and engagement rates, particularly on Twitter and Reddit.
• Surveys (15%): Previously included weekly polls from thousands of crypto investors to gauge sentiment.
• Bitcoin Dominance (10%): Tracks Bitcoin’s market share, as higher dominance often reflects risk-averse behavior.
• Google Search Trends (10%): Analyzes changes in search volumes for Bitcoin-related keywords to gauge public interest.

Research Methodology

We collected daily Crypto Fear and Greed Index values from Alternative.me, spanning February 2018 through February 2025.

Leveraging this dataset, we examined the performance of Bitcoin and major altcoins under varying sentiment conditions. For each day in the dataset, we simulated purchases at the closing price and assessed returns across multiple holding periods:

• 1 day
• 7 days
• 14 days
• 21 days
• 28 days
• 1 month
• 2 months
• 3 months
• 4 months
• 5 months
• 6 months
• 7 months
• 8 months
• 9 months
• 10 months
• 11 months
• 12 months (360 days)
• 1 year (365 days)

Each day’s sentiment was classified into five categories based on the index reading: Extreme Fear (0–24), Fear (25–49), Neutral (50–54), Greed (55–74) and Extreme Greed (75–100). For each category, we calculated the average investment returns across the aforementioned holding periods to evaluate how sentiment levels correlated with performance outcomes.

Can the Fear and Greed Index Help Investors?

The prevailing logic suggests that investing during periods of Extreme Fear would deliver the highest subsequent returns—a classic “buy when there’s blood in the streets” scenario—while Extreme Greed would theoretically signal an opportune time to reduce exposure. However, the data unearthed some surprising nuances.

Bitcoin Performance

For Bitcoin, while buying during periods of fear proved advantageous, it was days marked by Neutral sentiment that delivered the best overall returns in our analysis. Ranking the average performance by sentiment category revealed the following:

• Neutral sentiment days resulted in the highest subsequent returns on average.
• Extreme Fear and Fear came in second and third (both yielded strong performance and were very close to each other).
• Extreme Greed ranked fourth.
• Greed produced the worst returns on average.
• Longer holding periods consistently led to greater gains across all sentiment categories.

The results challenge the straightforward contrarian approach. While purchasing during fearful periods did produce solid gains, the most consistent gains for Bitcoin were achieved when the market was in a Neutral state.

One possible interpretation is that neutral sentiment tends to follow periods of extreme fear when the market has already absorbed the brunt of the selling pressure. By the time sentiment transitions from fear to neutrality, panic-driven exits have subsided, weak hands have capitulated, and prices have stabilized at more attractive levels.

Another factor is market confirmation. During periods of extreme fear, sentiment reaches its lowest point. While long-term gains from investing during such phases can be substantial, accurately timing the absolute bottom is exceedingly difficult. Those who buy too early in the fear phase often endure further downside before the market trend reverses. In contrast, neutral sentiment signals that the worst may have passed.

Neutral sentiment can also emerge after periods of extreme greed or following the conclusion of a bull run. In these scenarios, the market has cooled, speculation has faded and prices have started to decline from their peaks. This state could provide a better entry point than buying at the height of euphoric market conditions.

Even after a bull cycle concludes, assets stabilize at levels below their peaks but still above the depths of a true bear market bottom, forming an ideal middle ground. Investors entering at this stage avoid the worst of the greed-driven frenzy and position themselves advantageously ahead of the market’s next significant shift.

Greed proved to be the worst-performing sentiment phase, often signaling one of two scenarios: Either the bull cycle has ended and the market is entering a cooling-off period, or it represents a local top ahead of another downturn. When Greed follows Extreme Greed, it typically indicates that the most significant gains have already been realized.

On the flip side, when Greed appears before Extreme Greed, it can mislead investors into believing they’re catching the early stages of a bull run. However, crypto is volatile, often making this phase a false signal—a fleeting way of optimism before another leg down.

Greed can occasionally precede a full-scale rally, but just as often, it’s just as likely to result in stalling consolidation or a reversal into another correction. It’s the most uncertain sentiment phase, offering the poorest balance of risk and reward.

Altcoin Performance

For altcoins, the observed patterns diverged significantly from those of Bitcoin. Analyzing the leading altcoins by market capitalization revealed the following:

• The worst returns were consistently delivered when buying during the plain Greed phase.
• Perhaps counterintuitively, the best average returns for altcoins occurred when buying during the Extreme Greed phases.
• The strongest long-term returns for many altcoins materialized six to nine months after an Extreme Greed phase before succumbing to a bear market decline.

Why does this happen?

The differing behavior between Bitcoin and altcoins can be attributed to fluctuations in Bitcoin dominance and liquidity cycles.

Bitcoin dominance measures Bitcoin’s share of the total cryptocurrency market capitalization. A rise in dominance suggests investors are shifting funds into Bitcoin, often out of fear, treating BTC as a safe haven. When BTC dominance declines, it indicates a flow of capital into riskier altcoins as investors become more speculative (greedy).

In practical terms, extreme greed in the market typically coincides with “altcoin season,” a period when altcoins outpace Bitcoin in their price surges.

During these periods, Bitcoin’s price may peak or consolidate, causing excess liquidity to flow into altcoins, driving their prices up aggressively. This aligns with our study, which identified the best altcoin returns during Extreme Greed.

Still, there were some discrepancies.

Unlike most altcoins, Chainlink’s (LINK) performance aligned more closely with Bitcoin’s pattern. The highest returns for LINK were achieved by buying during Extreme Fear, Fear, or Neutral sentiment phases rather than during Extreme Greed. So, Chainlink favored contrarian strategies, rewarding investments made on fearful days over those chasing euphoric market highs.

Litecoin (LTC) closely mirrored Bitcoin’s sentiment-return profile. The optimal times to buy LTC were during Neutral conditions, followed by Extreme Fear and Fear phases. Purchases made during Extreme Greed phase ranked next, with Greed phase offering the least favorable returns.

Sui (SUI), launched in 2023, has a limited data history, making its performance patterns unclear or inconclusive due to the short timeframe. As a result, firm timing insights cannot yet be established. However, based on the available two-year data, the contrarian approach appears to hold true.

Toncoin (TON) showed relatively consistent returns across all sentiment phases, with no extreme outlier. The Neutral phase was the sole exception, delivering the strongest returns, while all other sentiment levels produced more or less similar performance.

Conclusion

Warren Buffett’s timeless advice, “Be fearful when others are greedy and greedy when others are fearful,” has become a cornerstone for market timing strategies. The Fear and Greed Index seeks to encapsulate this philosophy into a measurable framework, offering investors a lens into collective market psychology.

However, as with most things in life, the practical application is nuanced and contingent on context:

It depends on what you invest in.
It depends on when you invest.
It depends on why you invest.
It depends on how much you invest.
It even depends on who else is investing.

Greed and fear, while influential, alone do not solely determine investment outcomes. Terra (LUNA) once appeared invincible, yet its catastrophic collapse exposed a critical flaw in its model—one that many overlooked amid the allure of skyrocketing prices and perceived stability. As the crash unfolded, Buffett’s famous adage was echoed by some, believing they were seizing a rare opportunity.

However, the decline persisted, wiping out billions as LUNA collapsed. Greed mistimed and misplaced—investing in the wrong asset at the wrong moment—can be every bit as devastating as capitulating in panic at the market’s nadir.

The discrepancies observed in cryptocurrencies, like Toncoin, highlight that no single strategy applies universally across all cryptocurrencies. A one-size-fits-all approach simply doesn’t work. Fear and Greed should be viewed as a complementary tool rather than a definitive indicator.

It can highlight potential opportunities, but relying on it exclusively—without evaluating an asset’s fundamentals, tokenomics, real-world use, developer activity, liquidity, adoption and overall macroeconomic factors—is a risky bet.

The traditional approach to investing remains timeless: thorough research is, and always will be the most reliable strategy. Buying is a logical decision if an asset’s fundamentals indicate it is undervalued. Conversely, if it appears overvalued, the rational course of action is to sell.

Our study is just one of countless analyses available. Numbers can be interpreted in ways that align with existing biases, often reinforcing preconceived notions rather than challenging them. The key takeaway is to avoid relying solely on any single indicator, signal, or model for investment decisions. A robust framework demands incorporating diverse perspectives, as no single tool—no matter how insightful—can substitute for a comprehensive and well-rounded approach.

CCN Reports is a regular series that delves into the details to provide in-depth analysis of cryptocurrencies and the companies associated with them. We aim to engage a global audience interested in what’s what, who’s who and perhaps even why’s that.