While investors may have used various indicators and other analytical techniques to time the price fluctuations of a crypto coin, it is this index of crypto fear and greed that is likely to become increasingly popular as a way of measuring crypto market sentiment.
What Is Crypto Fear and Greed Index?
The fear and greed index is a basic way of measuring whether the market is “overbought” or “oversold”. If market conditions are overbought and potentially ready for correction or selling, the index will automatically indicate that the market is Greedy. On the other hand, if the market is oversold and has the potential to present a buying opportunity, the index will automatically indicate that the market is Fear.
This index is popular and has been used in the stock and crypto markets, because after all this tool will make up for the lack of emotional investors themselves. So that by showing the potential for market movements through this index, investors will find it easier to determine their next action.
Simply put, the Index can show the current emotional state in the market. The main emotions in financial markets, fear, and greed, do greatly influence the decisions of investors themselves. Excessive fear can cause the market to trade below intrinsic value, while too much greed can cause investors to trade above it.
It is this fear of selling that increases supply and lowers prices, while greed persists and has the opposite effect. For that reason, the crypto fear and greed index app is here as a tool for investors.
How It Works?
In its operation, the fear and greed index will use several data sources to generate conclusions on the current market conditions. The following are some of the things that are the working source of the crypto fear and greed index app.
The index will compare the current drawdown and volatility of a crypto coin with the average value of the last 30 to 90 days to gauge fear. When the current average is higher, it means there is more fear in the market.
Market Volume and Momentum
The index will also assess the volume buying occurs, if daily high volume conditions in a rising market then the index will interpret it as a sign of greed and FOMO (fear of missing out).
Social Media Sentiment
The algorithms in the index will also calculate relevant hashtags and keywords. This sounds quite unique, because that’s how the index can measure how fast the user posted this. A lot of interest will indicate a buoyant market, but on the other hand if interest is rated unusually high then this indicates greed.
Market dominance is one of the important metrics in index operations. High dominance will show a fear of investing in altcoins which are quite risky. This is because Bitcoin has a function as a crypto reserve currency, and investors will use it as a store of value. So, when BTC dominance is low, investors will tend to buy riskier altcoins, indirectly this action shows greed.
Through alternative.me, search query data from Google will be retrieved and the numbers compiled. If the search volume for certain keywords and terms, for example “bitcoin price manipulation” increases sharply, it can automatically be interpreted as increasing fear.
But, keep in mind that extreme fear or greed does not always mean that it is the top or bottom, because greed or fear can last for months at a given moment.
How to Use?
It must be admitted that the cryptocurrency market is still in its infancy, which makes it very volatile, especially with so much fear and greed. However, knowing the direction of the cryptocurrency fear and greed index can help you make better decisions, rather than just following your own emotions.
As usual, a correction is possible in a market that is usually triggered by extreme greed. A market in a state of extreme fear will usually be a good opportunity to invest. Basing your investment decisions entirely on the cryptocurrency fear and greed index is highly discouraged. But at least this can serve as another guide for you in making decisions. Therefore, always do your own and sufficient research.