Over the past decade, Bitcoin has been an extremely polarizing investment. Critics dismiss crypto as just another bubble, but staunch supporters see the immense potential of a decentralized, inflation-proof currency. Most investors, though, fall somewhere between these two sentiments. They buy or sell based on instinct, which is influenced by these opposing mindsets, and drives the demand and supply of Bitcoin.
To attempt to gauge the sentiment of a majority of investors, Alternative.me adapted CNNMoney’s ‘Fear and Greed Index’ to suit Bitcoin and by extension, other cryptos.
Fear? Or Greed?
Warren Buffett once said, “Be fearful when others are greedy and greedy when others are fearful.”
Swimming against the tide offers investors a great opportunity. In a market where everyone is motivated by fear to sell, prices drop. That’s a great opportunity to buy relatively cheap crypto. Inevitably, the tide will turn, and when it does, investors get greedy. This increased demand turns the market bullish and you’ll find your investment has grown thanks to other investors’ FOMO-fuelled greed. While they fear missing out, you might consider cashing out!
Bitcoin’s Fear And Greed Index is a useful tool to gauge the public sentiment, with 0 showing that investors are absolutely petrified and 100 showing pure, unadulterated greed. A score of upto 24 is Extreme Fear, while 25-49 is Fear. 50 is roughly neutral. A score between 51 and 74 shows Greed in the market, and a score over 75 heralds Extreme Greed.
Factors That Influence The Fear And Greed Index
By and large, times of extreme fear may be a good time to make larger purchases. Conversely, it might be a good idea to sell when the index shows that the market sentiment is leaning heavily on greed. Alternative.me’s crypto-specific index updates once a day and is a simple tool for lay investors. As you can imagine, they track several factors and assign them varying weightages to calculate Bitcoin’s Fear And Greed Index.
This measures Bitcoin’s current volatility against values from the last 30 and 90 days. A more volatile, skittish market might indicate fear.
Market Volume 25%
If there is a strong upward momentum when comparing the current market volume and market momentum to the average of the last 30 and 90 days, it might indicate a bullish market.
Social Media 15%
This marker pulls sentiment analysis from likes, posts and hashtags from Twitter. Sharp increases over a short period often indicate a greedy market.
Results of Surveys 15%
Weekly polls indicate what individuals think of the markets, and this is a way to figure out what direction it might head in.
Bitcoin Dominance 10%
Of the total crypto market capitalization, what percentage is Bitcoin’s presently? The more Bitcoin dominates this metric, the less space there is for altcoins. This might signal bearish tendencies.
Google Trends 10%
Google search trends for Bitcoin-related terms, including search volumes and recommendations from popular sites, show how much interest there is for information on Bitcoin and which way the wind is blowing.
Other Factors To Consider
Naturally, the Fear And Greed Index isn’t a magic potion and it has its limitations.
Like all forecasting tools, it is not 100% accurate. It only indicates attitudes towards Bitcoin. It’s a valuable tool that shows historical correlations between the peaks and troughs of the currency, and investors’ attitudes. There are, naturally, exceptions.
For instance earlier this year, the Crypto Fear & Greed Index was at a confident and greedy 73 on Apr. 20, dropped to 27 on Apr. 26 and rose to 73 again on May 9. Those who bought it on the 9th of May at $58,953.80 would see the value drop to $49,444 by 13th May and continue to drop through the now-infamous Spring Crash of 2021 when Bitcoin lost 50% of its value and stayed there for months. 21st July saw the Fear And Greed Index at an abysmal 10 which would have discouraged investors from buying BTC. Yet, it was the pitch-black dark before dawn, because that was when Bitcoin turned a corner and has been rising ever since and hitting all-time highs recently.
If you look at the Fear And Greed Index as your only source of information, this would make absolutely no sense. But as economist John Maynard Keynes succinctly put it, “The stock market can remain irrational longer than you can remain solvent.” If any tool could accurately predict the market, everyone would adopt it so quickly that it no longer would remain accurate. These tools are all pieces in a complex puzzle that will not so willingly give up its secrets. Till then, The Fear And Greed Index is one of many indicators and it’s best used in conjunction with other forecasting tools. At the end of the day, nothing beats doing your own homework by studying market trends and keeping track of what’s the latest in the cryptosphere.