Cryptocurrencies have gained immense popularity as an investment class but investors must bear in mind this crypto space is relatively more volatile than stocks or commodities. However, like in other markets, there are tools that can help in getting a broad sense of the direction of crypto prices. One such tool that is popular among crypto investors is the Fear and Greed Index.
This index is similar to the stock market fear and greed index, which Investopedia suggests was created by CNNMoney to measure the two primary emotions that influence investors’ market decisions.
The crypto index, which is currently only for Bitcoin, captures bearish and bullish trends by gauging investor sentiment for the coin. As the name suggests, the market trend is identified based on two emotions – fear and greed.
What is the Fear and Greed Index for Bitcoin
Alternative.me, a website that provides statistics and lists various software and their alternatives, designed the fear and greed index to determine the performance of crypto assets. While the index is currently applicable only to Bitcoin, other cryptos are expected to be added soon.
Alternative.me explains: “The crypto market behaviour is very emotional. People tend to get greedy when the market is rising which results in FOMO (Fear of missing out). Also, people often sell their coins in the irrational reaction of seeing red numbers. With our Fear and Greed Index, we try to save you from your own emotional overreactions.”
How does it work?
The fear and greed index is on a scale of 0-100, where 0 represents extreme fear, and 100 represents extreme greed. A score of 50 represents neutral, where the investors are neither greedy nor fearful.
In a blog, Alternative.me laid out the two assumptions around investor sentiment. If investors are becoming too fearful, then it could be a good buying opportunity and if they are too greedy, the market may be due for a correction.
The sentiment is analysed based on data from five sources; all of them are valued the same as the day before to represent meaningful progress.
Weekly crypto polls were also conducted in conjunction with strawpoll.com (owned by Alternative.me) asking investors their view/outlook on the market. However, such surveys are currently on hold.
At the time of writing this article, the crypto fear and greed index reflected fear, with a score of 33. Typically, a score below 25 would signify extreme fear and might be a good time to explore buying opportunities. A score above 75 might mean extreme greed and an ideal time to start booking profits.
However, investors must keep in mind that a single tool such as this index may not present a complete picture of the trend in crypto prices, and relying on just one tool to make any investment decisions may prove to be risky. It is always advisable to research well to make informed decisions.
(Edited by : Yashi Gupta)