In the investment space, fear and greed are strong emotions that can influence investor behavior, which in turn can affect the stock market, the crypto exchange, and Bitcoin. The Fear and Greed Index, developed by CNNMoney, is a multifactorial indicator of stock market sentiment that aims to determine which of these emotions might drive the stock market at any given time.
Fear and Greed Index Effect
The fear index pushes investors to flee Bitcoin and other cryptocurrencies in panic when the market goes down. Greed is often at the root of the “irrational outburst” that can lead to stock market bubbles. When these feelings change from fear to greed or vice versa, you can predict a change of direction in the stock market.
The premise of the Fear and Greed Index is:
- Excessive fear can cause cryptocurrencies to be oversold or lose value. This is also an indicator of purchase.
- Unbridled greed can lead to overbuying or overvaluing of cryptocurrencies, which can trigger a sell-off.
In this context, the Fear and Greed Index is seen as a counter-tool that measures the level of fear and greed in the market, allowing investors to buy when others are afraid, or sell when everyone becomes too greedy.
Theoretically, by understanding the current Bitcoin and stock market sentiment, investors can manage their risks and make effective allocation decisions.
For example;
- When the fear index goes down: Cryptocurrencies show a downward trend and investors can increase the amount of cash to minimize risk.
- When the greed index is on the rise: Cryptocurrencies start to rise and investors may want to increase the amount of cryptocurrencies they hold.
However, this is not as clear as it seems, the best buying opportunities usually arise when prices are low, and the best selling opportunities usually occur when prices are approaching their peak.
How does the Fear and Greed Index work?
The Fear and Greed Index is a compilation of six different indicators that measure investor behavior.
- Price increase of crypto units,
- The strength of the price of cryptocurrencies,
- Price amplitude of cryptocurrencies,
- Call and Sell Options,
- Market Volatility,
- Safe Harbor Request,
The index tracks how much individual indicators deviate from their average compared to their normal deviations. The index gives equal weight to each indicator when calculating a score from 0 to 100, where 100 represents maximum greed and 0 represents maximum fear.
The components of the Fear and Greed Index include;
- Price increase of cryptocurrencies
– Uses its 125-day moving average to measure how cryptocurrencies are valued.
- The strength of the price of cryptocurrencies
– Tracks cryptocurrencies that hit the highs and lows of the 52-week average to show whether they are overvalued or undervalued.
- Price amplitude of cryptocurrencies
– Tracks the volume of rising or falling cryptocurrencies, which can indicate a bullish or bearish feeling.
- Call and Sell Options
– Tracks the ratio of call options (buy option of cryptocurrencies) to put options (option of cryptocurrencies) as an indicator of rise or fall.
5.Market Volatility
– Follows the CBOE Volatility Index (VIX) as an indicator of traders’ 30-day volatility expectations. Increased expectations may indicate increased anxiety.
6.Safe Harbor Request
– The investor follows the returns of cryptocurrencies as an indicator of risk appetite.
Fear and greed index for crypto
With the cryptocurrency market, especially Bitcoin, getting so much attention, it was only a matter of time before someone came out with the Crypto Greed and Fear Index. The index, which is displayed and updated every eight hours on Alternative.me website, uses four data sets to calculate its score from 0 to 100 (from extreme fear to extreme greed).
The data includes;
- Available volume: Measured using historical data to indicate level
- Clear interest: At the same time, compared to past data, high open interest indicates that there is more greed in the market.
- Social media sentiment from Reddit and Twitter: May reveal changes in sensitivity
- Search data from Google and Bing: Search volume and trends for cryptocurrency (Bitcoin, DogeCoin, etc.) terms may also indicate changing sentiment