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Crypto Fear And Greed Index, Explained

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Andrew Kamsky
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Key Takeaways

  • The Crypto Fear and Greed Index assesses market sentiment on a 1-100 scale, reflecting fear (1) to greed (100). 
  • The index offers sentiment insights incorporating factors like volatility, momentum, social media, surveys, and dominance.
  • Low index values indicate undervaluation (fear), while high values imply overvaluation (greed).
  • The index aids decision-making, yet solely relying on sentiment, short-term focus, and potential biases are drawbacks.

This index, scaled from 1 to 100, provides a quick snapshot of whether the market is leaning towards fear or greed, which can heavily influence asset prices.  

In periods of extreme greed (high index values), there may be increased buying activity, often driven by FOMO (fear of missing out), which can lead to overvalued prices and heightened risk of a market correction. As such, the Crypto Fear and Greed Index can serve as a tool for timing entry and exit points, though it should be used with caution.

What is the Crypto Fear and Greed Index?

The Crypto Fear and Greed Index is a metric designed to assess the market sentiment of cryptocurrencies at any given moment. This index measures a spectrum from a single number between 1 and 100, showing extreme fear (1) to extreme greed (100) within the market.

An index value of 1 suggests the asset is oversold, offering a buying opportunity. Meanwhile, an index value of 100 may be seen as an opportunity for a sell signal, reflecting an overbought market. 

As of Dec. 17, according to Coinglass, the Crypto Fear and Greed Index stands at 87, indicating “Extreme Greed” in the market. This level of greed suggests that investors are feeling highly optimistic and confident, which can often be driven by strong price rallies and positive market sentiment. While this can indicate bullish market conditions, it also raises the possibility of an overheated market, where prices may be inflated, potentially leading to increased risk of correction or volatility.

Greed and Fear Index as of Dec.17 Source: Coinglass
Greed and Fear Index as of Dec.17 Source: Coinglass

History Of The Crypto Fear And Greed Index 

First introduced in February 2018 by alternative.me, this index is Bitcoin-specific but is often used to assess the sentiment of the broader crypto sector. While traditional indices focus on asset performance, the crypto index factors in triggers that lead to deviations from long-term price ranges. The Fear and Greed Index was built on the following components:

  • Volatility: Volatility measures how much a market or asset’s price fluctuates over time. Higher volatility is mainly associated with fear or euphoria.
  • Market momentum/volume: Market momentum or volume is the speed or momentum at which price changes are measured. Strong momentum indicates strong price movement, which can correlate with market greed. High volume in a bullish market can reflect greed, while low volume in a bearish market can indicate fear.
  • Social media: Positive or negative sentiment on social media can influence market sentiment indicators.
  • Surveys: Survey data contributes to the sentiment index and offers an additional perspective on market sentiment.
  • Dominance: Dominance refers to the market share of Bitcoin. Higher dominance can indicate market confidence, possibly reflecting greed. Lower dominance may suggest diversification and caution, aligning with fear.

Warren Buffett quotes, “Be fearful when others are greedy and greedy when others are fearful,” underscores the value of contrarian thinking. When index values are low, buying on market downturns might be advantageous, potentially leading to positive returns. The opposite thinking holds when the fear and factor indicator is printing at higher levels.

Interpreting Index Values

Extreme Fear (0-25) 

During the period of lowest fear in February 2018, the Fear & Greed Index stood at 8, with a Bitcoin price  of around $6,817. Another instance of minimal fear was in March 2020, with the Fear & Greed Index bottoming at nine and Bitcoin’s value at approximately $5,032. The snapshots below respectively reflect moments when market sentiment indicated a sense of extreme caution or concern. The market bottom for 2022 was around 21.

Fear And Greed Index 2018 | Credit: Lookintobitcoin
Fear And Greed Index 2018 | Credit: Lookintobitcoin

Extreme Greed (75-100)

In June 2019, the Fear & Greed Index registered 95 alongside a Bitcoin price of $13,025. This optimism influenced decision-making, driven by the fear of missing out. A similar instance occurred in February 2021, with the Fear & Greed Index hitting 95 and the Bitcoin price at $52,354, respectively. The high of March 2024 came in at around 86, and at the time of breaking new All-Time Highs in November 2024, the index was around 78.

November 2024 Fear And Greed Index
November 2024 Fear And Greed Index

Use Cases Of The Fear And Greed Index For Investors

Investors can leverage the Fear and Greed Index to make informed decisions in the financial markets. When the crypto market signals fear, the price might become oversold or undervalued, presenting a chance for investors to enter the market at favorable prices.

On the flip side, during phases of extreme greed, the index helps identify overbought conditions where stocks may be overvalued. This recognition can serve as a signal for cautiousness and potentially taking profits. 

By tracking the shifts between fear and greed, investors can choose to make positional trades to adjust portfolios, manage risk accordingly, and create instances to capitalize on market trend change opportunities as investors watch the market.

What Are The Drawbacks Of The Crypto And Fear Index?

Like any indicator, some limitations and drawbacks should be considered before making financial decisions. Some drawbacks of the crypto Fear and Greed Index include:

  • Sole reliance on sentiment: The index doesn’t take into account fundamental factors like technology , adoption, or utility of a cryptocurrency. Market sentiment alone does not accurately reflect the underlying fundamentals of a cryptocurrency.
  • Short-term focus: The index is more effective for short-term market analysis, as it measures immediate sentiment.
  • Lack of context: The index may not consider external factors that can influence sentiment, such as macroeconomic and black swan events, regulatory changes, or technological developments.
  • Subjectivity: The classification of sentiment into categories like “extreme fear” or “extreme greed” is subjective and can vary from person to person.
  • Market manipulation: Extreme market movements can sometimes be artificially created, potentially leading to misleading signals.
  • Inaccuracy in extreme situations: In extreme market conditions, such as a market crash or rapid price surges, the index might not accurately capture the sentiment due to its simple calculation methodology.

Conclusion

The Crypto Fear and Greed Index offers investors and traders a source and valuable tool to navigate a volatile cryptocurrency market, helping traders and investors make informed decisions. 

While it presents insights into investor emotions, it’s important to recognize its limitations and use it as a complement to comprehensive market analysis.

FAQs

What does the Crypto Fear and Greed Index tell you?

The Crypto Fear and Greed Index quantifies cryptocurrency market sentiment on a scale from 1 to 100, representing extreme fear to extreme greed. A low index (e.g., 1) suggests oversold assets, while a high index (e.g.,100) indicates an overbought market.

How is the Crypto Fear and Greed Index computed?

Introduced in 2018, this Bitcoin-centric index offers insight into crypto sentiment. It factors in components like volatility, market momentum/volume, social media, surveys, and dominance. Higher volatility often relates to fear, while momentum and social media can correlate with greed.

How to Interpret Crypto Fear and Greed Index Values?

The index ranges from 0 (Extreme Fear) to 100 (Extreme Greed). Low values imply fear and undervaluation, while high values suggest greed and overvaluation. Contrarian thinking aligns with Warren Buffett’s quote to buy during fear and be cautious during greed.

What are the limitations of the Crypto Fear and Greed Index?

The index relies solely on sentiment and is suitable for short-term analysis. External factors, like macroeconomic events, aren’t always considered. Classification of sentiment is subjective, and it lacks fundamental analysis, potentially missing technological or adoption factors. Extreme situations might lead to inaccurate readings due to its simple calculation method.

Disclaimer: The information provided in this article is for informational purposes only. It is not intended to be, nor should it be construed as, financial advice. We do not make any warranties regarding the completeness, reliability, or accuracy of this information. All investments involve risk, and past performance does not guarantee future results. We recommend consulting a financial advisor before making any investment decisions.
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Andrew Kamsky

Andrew Kamsky is a writer and chart analyst, holding a degree in Economics and an ACCA certification. Andrew’s professional background spans roles at a Big Four accountancy firm, a fintech bank, and a chart analyst position at a listed bank focusing on foreign currency hedging. Beyond his financial career, Andrew is passionate about music, glass neon lights and travel.
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