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EducationalNovember 24, 2021

What is Crypto Fear and Greed Index and how does it work?

Shubham Goyal
Product Specialist
November 24, 2021

The cryptocurrency market is highly volatile. In November 2021, it was on the verge of a tremendous bull run, with digital currencies reaching all-time highs in an unprecedented market. In such a situation, when the market is on the rise, people become greedy, resulting in FOMO (Fear of missing out).On the other hand, investors can start selling their currencies irrationally if they see too many red numbers. Both of these can result in a direct hit on the stability of portfolios.

The Fear and Greed index is one measure of the market’s state. It was launched at Alternative.me. While measuring and judging the crypto market can be tricky, these indices can give you a fair idea by tracking cryptocurrencies as it swivels from deep lows and highs.

The index is made up of two opposing emotions: fear and greed. It reflects whether the market is bullish (markets experiencing sustained increase) or bearish (markets suffering sustained decrease). Extreme anxiety indicates that investors are too concerned about an opportunity to purchase, whereas excessive greed indicates that the market is due for a correction.

The index’s main principle is that when investors are frightened, stock prices will trade far lower than their true value, and when investors are greedy, they will pay well over the stock’s intrinsic value.

Please keep in mind that this index does not forecast price changes. Even at the extreme extremes of the scale, low numbers do not invariably precede declines or high number increases. Most of the time, these indicators reflect what has already transpired.

Let us look at an example of this.

The price of one Bitcoin was slightly under $57,000 on May 11th of this year. The FOMO Index was at 61, which was halfway between “Neutral” and “Greed.”

BTC fell to $49,500 on the 12th. A decrease of 13% marked one of the worst 24-hour periods of the year in severity. Meanwhile, the FOMO Index had risen to 68. Only the next day, as a result of the price drop, did sentiment change.

The 22nd and 23rd of February showed a roughly identical pattern. The same event happened on April 25th and 26th but in the opposite direction. It holds whether you measure in weeks or months.

The fear and greed indices follow the crypto.

Calculation of the Fear and Greed Index

The index ranges from 0 to 100.

Investors with a score of 0 are too bearish or afraid, while those with a score of 100 are overly optimistic and greedy.

The score categories can be divided into the following:

  • Extreme Fear : 0-24
  • Fear: 24-49
  • Neutral: 50
  • Greed: 51-74
  • Extreme Greed: 75-100

What are the sources of Data?

To illustrate significant progress in the crypto market’s attitude change, each data point is valued the same as the day before. Currently, the index only provides the trends of Bitcoin with a promise to include other large altcoins soon.

Alternative.me uses the following factors or sources to measure the index. They are:

  1. Volatility (25 %)
  2. Market Momentum/Volume (25%)
  3. Social Media (15%)
  4. Surveys (15%) currently paused
  5. Dominance (10%)
  6. Trends (10%)

Conclusion

The Fear and Greed index efficiently gauges investors’ sentiments toward the market and provides them with a simplified view of how the market is performing. Although there are varying views on the efficiency of the crypto fear and greed index, it accurately indicates significant changes in the history of the coin.

Investors generally believe that the index is a good instrument for assessing markets as long as it is not utilized as the sole tool for making decisions and conducting your research. No tool developed today or tomorrow can present you with a full proof picture of market trends, especially Cryptocurrencies.

It’s better to curb the rising sense of FOMO and do proper research.

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