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Trading is all about analysis, reading the market, and acquiring every necessary piece of information available. But, while having statistics and chart readings is necessary, human emotions still play a huge role in the market and they can have a significant impact on price movements.
These human emotions are even more present in crypto markets, as cryptocurrencies are speculative assets and their price entirely depends on what people think about them. What this means is that even if you have all of the necessary technical data and information, not taking human emotions into account when trading crypto, can result in you making losses.
There are many different ways to check what people think and what emotions are present on the market. Amongst them, the Crypto Fear and Greed Index is the best tool to use, as it combines multiple different factors and combines them in one index. But what exactly is this index and how does it work?
The Crypto Fear and Greed Index fund is a metric that measures market sentiment and it uses social signals through different sources and market trends to determine what investors are thinking and show the overall market sentiment. This index measures how likely investors are to buy cryptocurrencies and it’s based on two human emotions, fear and greed.
The Crypto Fear and Greed Index takes the price of Bitcoin and some other cryptocurrencies and checks if there is fear or greed. This index is displayed as an indicator and it moves between 0 and 100, where 0 indicates extreme fear and 100 indicates extreme greed. During the fear period, investors are more likely to sell, while during greed, investors are actively buying and prices are rising.
This index is commonly divided into four levels and most investors make decisions based on what level the indicator is showing. When the index is between 0-24, it usually means extreme fear and prices are dropping, while 25-49 is classified as fear/neutral and during this time, the market is not in extreme fear, but still more are selling than buying. 50-74 is neutral/greed level, which means that greed is intensifying and more and more people are starting to buy. 75-100 is extreme greed and this is when prices are skyrocketing and in most cases, cryptocurrencies are being overvalued due to these high buying quantities.
Since this is an index, it takes multiple data sources and combines them into a single readable data value, and gives us signals according to the value. There are many different data sources that this index takes into account, but there are several that have the biggest impact, and these are what we will be taking a look at.
Trading volume and market momentum are one of the most important factors to consider when trading with cryptocurrencies. Market momentum tracks price movements for certain periods and it gives us significant information about the current market state. Market momentum is commonly used in combination with trading volumes, the higher the trading volume, the more people are present on the market. With this, we can see how actively people are trading, and what impact this high or low activity has on the price, which can then be used to make decisions about future trades.
This is one of the integral parts of the Crypto Fear and Greed Index and it takes up about a fourth of the index total.
Volatility is another crucial metric in the Crypto Fear and Greed Index, and just like market momentum, it takes up a fourth part of the index. When looking at the volatility, this index compares current volatility to the volatility of the past 30 and 90 days.
When volatility is high, prices jump up and down pretty quickly, which can create fear in the market, as people will be uncertain about future prices. Because of this, if volatility is high, it generally results in a “fear” market, while when volatility is low, and prices have stable movements, there is less chaos on the market, and therefore fear is low.
Getting information directly from the market participants is a great way to get correct information about the market sentiment. The Crypto Fear and Greed Index surveys around 3,000 - 4,000 market participants and asks them general questions about the current market atmosphere and what they think is going to happen. With this information, the index can calculate if people are fearful or greedy, and in combination with other metrics, it displays the current market sentiment.
While surveys are a great way to accurately measure current market sentiment, there are still some factors that might result in wrong readings. Because of this, the Crypto Fear and Greed Index does not put as much weight on this metric as the previous two, and surveys account for just around 15% of this index.
Cryptocurrencies are digital currencies, so it should not be surprising that people who are involved in this market have a strong social media presence. Because of this, tracking social media activities is a great way to get general information about market sentiment.
The Crypto Fear and Greed Index uses algorithms to track social media activities involving cryptocurrencies, by checking hashtags and mentions of Bitcoin and some other cryptocurrencies. If the usage of these hashtags and mentions goes up, it means that there is a bigger interest in crypto, and greed is going to go up, but if the usage drops, it means there is less interest, and people might be in fear.
Tracking these social media platforms is important as a lot is happening in these spaces. There are constant practices of market manipulation that go on in and around social media platforms, and this is why this index takes this into account. But just like surveys, social media makes up around 15% of this index.
“Bitcoin dominance” is another metric that the Crypto Fear and Greed Index takes into account when analyzing the market. Bitcoin dominance is a metric that measures Bitcoin’s market capitalization against the market capitalization of altcoins, which in the end tells us if people are more interested in Bitcoin or altcoins.
Taking Bitcoin Dominance into account when calculating fear and greed levels is very important and it can give a very good insight into the market. When Bitcoin dominance is high, it generally means that people are buying more Bitcoin and fewer altcoins, which can suggest that people are in fear and buying Bitcoins, since it is considered to be a safe haven investment in crypto. While Bitcoin dominance is low, people are actively trading with altcoins, which can suggest that people are trying to make big profits, since altcoins usually have bigger price movements and greed is high on the market.
Bitcoin dominance is a good metric to consider, but it still can not be said that this is an integral part of the Crypto Fear and Greed Index, and because of this, it only accounts for 10% of the total index.
Just like social media platforms, tracking people's activities in Google searches can give a good insight into the current market sentiment. The Crypto Fear and Greed Index looks at Google search data for specific periods and checks how actively people are searching for Bitcoin and other crypto-related topics. If search volumes are high, it means that interest in crypto is rising and we are entering a “Greed” market, while if crypto-related searches are lowering, it means that interest is low, and we are moving towards “Fear” market.
There is a saying that you should not believe everything on Google, and this also applies to this metric. While it gives us good statistics, it still only accounts for 10% of the Crypto Fear and Greed Index and is used as a supporting metric.
The Crypto Fear and Greed Index is a great tool to use on a daily basis. This is an indicator that is available online and we don’t need to do any calculations. Simply checking this indicator every day to see what state the market is currently in can give you an advantage when it comes to making decisions about your upcoming trades. When using this index, you can also take into account 4 different levels of fear and greed and plan your trades accordingly. If you see that Fear is high, the likelihood of prices dropping is high, and you can open short positions, or close your long positions. If you see that we are in the Greed market, you might consider opening long positions, as buying is intensified and prices are expected to grow. While the two mid-levels of this index can be used alongside some other indicators and chart patterns as supporting tools in your decision-making.
The Crypto Fear and Greed Index is a crypto index that shows if the market is in a state of greed or fear. This index is divided into four levels, Extreme Fear (0-24), Fear/Neutral (25-49), Neutral/Greed (50-74), and Extreme Greed (75-100). When using this indicator you should check which level it shows and then act accordingly. For example, if we see that index is showing 10, it means extreme fear and there is low belief in the market. In this case, it might be best to close your long positions and open short ones, as prices are expected to drop.
Absolutely. Cryptocurrencies are highly speculative assets, and their price greatly depends on people's beliefs and market sentiment. The Crypto Fear and Greed Index looks specifically at human emotions and what people think right now. This should not be the only thing you are basing your trades on, but it is a great supporting tool to implement in your everyday trading activities. This is an indicator that can be easily checked every day and you can know what emotional state the market is in currently.