The phrase Fear and Greed Index is a common one for investors. Be it with stocks or cryptocurrencies; it's something every smart investor should consider. However, as a beginner, you probably wonder what it is and how it affects you.
The Fear and Greed Index analyzes emotions and sentiments, acting as a guide for investors. It comes from various sources and creates a hypothesis that may help you decide how you should choose your actions as an investor.
This article will tackle this fear and greed index and understand how it works and how you should act on it.
Without further ado, let's get into it!
What Is the Fear and Greed Index?
The Fear and Greed Index is a daily analysis of the emotions and sentiments of investors. In simple terms, it gives investors an update of how the totality of investors feels about the market.
Its purpose is to give every investor an idea of how the market goes by the day and how they should act.
As the name itself states, it's an index of how fearful or greedy the general investors are towards the market. As to how it works, we'll tackle it as we go on.
We have different kinds of this index, but we'll talk about the Crypto Fear and Greed Index in this article.
Crypto Fear and Greed Index
The Crypto Fear and Greed Index has a similar notion to other kinds. However, its primary focus and concern are cryptocurrencies.
This index measures how greedy or fearful the crypto investors are for the day. It's an analysis of emotions and sentiments coming from reliable sources.
Moreover, the Crypto Fear and Greed Index's concern is Bitcoin and other large cryptocurrencies. Thus, when we talk about this analysis, it's about how its investors are feeling.
In simple terms, this index is a snapshot of what Bitcoin is doing. It depends on things like sentiments, volatility, social media, dominance, and trends.
It gives a specific number to let you know what is happening in the cryptocurrencies.
Now, since it's all about fear and greed, why is it essential in the world of crypto investments?
Why Is Measuring Fear and Greed Important?
Measuring fear and greed is crucial because it affects the crypto market per se. To understand further, remember that the crypto market behavior is quite emotional.
We may think that investments are solely educated decisions. However, in reality, people have these tendencies to get greedy and to get fearful.
For instance, investors tend to get greedy when the market rises, resulting in that fear of missing out.
At the same time, people sell coins irrationally because they see the market falling. With this index, you will save yourself from emotional overreactions.
In this index, there are two assumptions.
First, extreme fear can mean that investors are getting too worried that the market is falling. When such happens, it can be a buying opportunity for you.
Second, extreme greed can mean that the market is due for a correction. This notion implies that it's not ideal to buy.
How Does the Crypto Fear and Greed Index Work?
As I said, this index works as a guide for you to understand the current emotional trend in the crypto market.
It measures fear and greed from zero to a hundred. The former represents extreme fear, while the latter means excessive greed.
When the index states that less than half of a hundred, then it means investors feel fear. This idea could imply the ideal time for you to buy since the market may go down.
If the index states more than half to a hundred, then it means investors are greedy. Thus, it may not be the ideal time for you to buy.
Now, the index doesn't come without any basis. It's a compilation of many data source that represents the investors' emotions.
Data Source for Fear and Greed Index
The Fear and Greed Index is a compilation of data from five primary sources. Each data point gets valued the same as the day before. This way, it can visualize meaningful progress in the crypto market's sentiment change.
There are many kinds of fear and greed index. However, these data sources are the ones you'll usually find in each.
Let's see each of these data sources.
Market Momentum/Volume
The market momentum/volume mirrors such emotions in a certain way. For instance, if there's a high buying volume on the market daily, it can mean the market is getting too greedy.
Social Media
Social Media is also a great source since it's a platform where investors are also present. For instance, when many people are talking and adding hashtags and create trends, it can mean high public interest. Moreover, higher interaction with posts related to the crypto world can mean a greedy market behavior.
Volatility
Volatility is the statistical measure of the dispersion of returns. In simple terms, the higher the volatility, the riskier the security. Thus, unusual rising volatility may mean a fearful market.
Surveys
Surveys also play a role when it comes to this index. With a survey, the index gets insights from a particular group of investors. While it may vary, it's still a good starting insight.
Dominance
Dominance is a measure of the strength of a coin in the crypto market. For instance, a rise in bitcoin dominance can be due to a fear of too speculative alt-coin investments. On the other hand, if it shrinks, people are getting greedy by investing in alt-coins.
Trends
Trends mean the analysis of movements coming from platforms like google trends. When the trends go up on the query: price manipulation can signify fear in the market. Of course, a trend seeking to acquire such can mean many people are getting greedy.
Current Crypto Fear and Greed Index Value
Final Thoughts
The Crypto Fear and Greed Index acts as a guide for investors to consider the market's emotions. There is no exact way to tell when you should buy and when you should not. However, with this index, you may get a sense of which action is ideal and which isn't.
In the end, it still depends on you as an investor if you wish to consider this index when buying. However, as an investor, you should learn that considering such things can be handy in the long run.
Resources
Photo by Ewan Kennedy on Unsplash
Published: 12/10/2020