Posted: 30.07.2021 | 07:26
What is The Crypto Fear and Greed Index?
The Crypto Fear and Greed Index gives a score of 0-100 for crypto market sentiment. It is based on the CNN Money Fear and Greed Index, which is used to analyze the stock market. Fear (0-49 points); indicates undervaluation and excess supply in the market. Greed (50-100 points) represents an overvaluation of cryptocurrencies and a possible bubble, in other words an inflated unreal price. Noticing changes in fear and greed levels should be a part of your trading strategy when deciding whether to enter or exit the crypto market.
When an investor makes decisions to invest in the crypto market or sell their savings, they are always looking for data to support their decision. Before investing or trading, charts should be examined, fundamental information should be analyzed and market sentiment should be taken into account. On the other hand, one of the most valuable concepts in this regard is the Crypto Fear and Greed Index. The Crypto Fear and Greed Index brings together sentiment metrics and key metrics to provide insight into market fear and greed.
What is an Index?
Traditionally, an index takes many data points and combines them into a single statistical measure. A famous index that tracks the securities market is the Dow Jones Industrial Average (DJIA). The DJIA is a combination created by averaging the prices of 30 major companies listed on various US stock exchanges. The Crypto Fear and Greed Index is also a weighted measure of market data, but the similarities only end there.
How Does the Crypto Fear and Greed Index Work?
Alternate.me calculates a new daily value from 0 to 100 every day. As of July 2021, the Crypto Fear and Greed Index only uses information related to Bitcoin. The main reason for this is that when it comes to price and sentiment, BTC shows a significant correlation with the overall crypto market. It is thought that there are plans to include other major coins, such as Ether (ETH) and BNB, possibly in the future.
The scale of the index can be divided into the following categories:
0-24: Extreme fear (orange)
25-49: Fear (amber/yellow)
50-74: Greed (light green)
75-100: Extreme greed (green)
The index calculates value by combining five different weighted market factors.
- Volatility (25% of index). Volatility is calculated by measuring the current value of Bitcoin with the last 30 and 90 day averages. The index is used here as an indicator of volatility in the market.
- Market momentum/volume (25% of index). Bitcoin's current trading volume and market momentum are compared with the last 30 and 90 day average values and then aggregated. Consistent high volume purchases indicate a positive or greedy market sentiment.
- Social media (15% of index). This factor looks at the number of Bitcoin-related Twitter hashtags and specifically their engagement rate. Persistent and unusually high interaction often has more to do with greed than fear.
- Bitcoin dominance (10% of the index). This data measures BTC's dominance in the market. Increasing market dominance indicates that there are new investments in cryptocurrencies and funds may have been transferred from altcoins to Bitcoin.
- Google Trends (10% of index). The index is able to offer a self-understanding of market sentiment by looking at Google Trends data for Bitcoin-related searches. For example, an increase in searches for "Bitcoin Scam" may indicate more fear in the market. Another example on the subject is “The increase in news about DeFi can also be interpreted as an increase in price because the amount locked to the crypto money system has increased and the supply has decreased as a result.