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Every speculative activity on the financial trading platform is governed by the fear and greed psychosis. That’s exactly the reason why markets experts have developed tools to map investor psychology reflective of underlying trend, to pre-empt the market move.
Much of the market moves are well entrenched in market behavior. At times volumes soar while prices witness sharp movement in certain cases to depict investor perception. Cryptocurrency markets are no different to such movement.
The Fear and Greed do govern Crypto movement. In fact, they are more prevalent in recent times, particularly after Terra Luna and FTX’s fall. Bitcoin prices have retreated to a fourth of its November 2021 peak level.
The need for measuring Fear & Greed
Well, we have just mentioned above that Bitcoin – the top cryptocurrency – value has declined sharply in last 12 months. The crypto market reacts emotionally when 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 irrational reaction of seeing red numbers. With our Fear and Greed Index, we try to save you from your own emotional overreactions. There are two simple assumptions:
The Thumb Rule
Extreme fear can be a sign that investors are too worried. That could be a buying opportunity. When Investors are getting too greedy, that means the market is due for a correction.
Therefore, we analyze the current sentiment of the Bitcoin market and crunch the numbers into a simple meter from 0 to 100. Zero means “Extreme Fear” while 100 means “Extreme Greed”.
The Index Methodology
The crypto Fear and Greed index is based on a combination of sentiment and fundamental metrics and hence it provides a glimpse of market sentiment.
A good investor will always look for supportive data. There are charts to look at, fundamental factors to rely upon as well as market sentiments to tap into.
It is observed that a fearful market would indicate that cryptocurrencies are undervalued. Greed in the market is the opposite situation.
The index value is calculated by combining five different weighted market factors, they are: Volatility (25% of the index), market momentum/volume (25% of the index), social media (15% of the index), Bitcoin (10% of the index), Google Trends (10% of the index), and Survey results (15% Index Score).
Conclusion
Given the wider influence of various factors on market sentiment, the Crypto Fear and Greed Index is a valuable tool. It can help keep a tab on changes, large swings and may provide an opportunity to enter or exit before the rest of the market follows the trend.
About Author
Laxmikant Khanvilkar
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