As panic spreads across the market, a little-known trading indicator called the ‘fear and greed index’ flashed red. At a reading of 15, it indicates ‘extreme fear’ in the cryptocurrency market – the lowest in more than a month.
But to some investors, this signal might indicate a buying opportunity.
The bitcoin fear gauge is by no means a perfect measure of the market, nor should it be used as a sole trading indicator. But it does help capture the sentiment of the bitcoin economy.
It works by tracking a number of factors: trading volume, volatility, social media mentions, Google trends, and survey responses all combine to track the market.
It works in a similar manner to the Volatility Index (VIX) on traditional markets by acting as a measure of investor greed and fear.
Today’s reading of 15 indicates extreme fear as traders grow worried about the bitcoin price.
A contrarian investor might look at the ‘extreme fear’ rating as an opportunity to buy. As trader Alex Kruger explained in the past:
“I don’t like the [fear and greed] index’s construction much, but it has been relatively accurate at pinpointing bottoms or nearabouts on the daily.”
The theory goes that the best time to buy an asset is when traders are scared to touch it. Hence the old adage, ‘buy when there’s blood in the streets.’
As crypto research company Messari pointed out, yesterday’s crash is nothing new to bitcoin. In fact, BTC has fallen 10% intraday at least 70 times in its ten-year history.
Still, the bloodshed might not be over yet. Trader Josh Rager sees the bitcoin price heading towards $7,000 where a large volume of demand lies in wait.
Trader Cantering Clark echoed the sentiment, pointing out that, even after a huge break downwards, buyers have not rushed in to capitalize. He believes selling pressure remains from those who didn’t catch the bottom, but bought on the way up.
“Long period of consolidation breaks down in the unexpected direction. Massive dump, buyers not jumping at prices.”
The bitcoin fear and greed index may have further to plunge yet.
Last modified: September 25, 2019 12:24 PM UTC