What is crypto fear and greed index?

Summary

  • A crypto fear and greed index is essentially an oscillator, which quantitively depicts the sentiments of crypto investors/speculators.
  • Generally, it ranges in value from 0 to 100, with 0 depicting extreme fear and 100 being extreme greed.
  • It shows when the underlying crypto has become overbought or oversold, providing an advanced warning for a reversal.

In the parlance of technical index, there are numerous technical indicators that are specifically designed to gauge the sentiments of investors with respect to the underlying market. Quite often, investors come across terms such as the “market is fearful” (generally during bear market) or investors’ greed, which makes headlines in a bull market.

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All these phrases are just the depiction of investors’ sentiments. However, one drawback of these forms of sentiments representations is they are subjective in nature. This makes it difficult to perform a concrete analysis of the market. To overcome this problem, all one has to do is to objectify what a fearful or a greedy market is (according to him/her) and create an oscillator around the underlying assumption.

This oscillator then has a highest value and a lowest value, which quantitively denote how much fear or greed persists in the market. High values of the oscillator denote a rising market (greed) and lower values denote a falling market (fear). This is essentially a fear and greed index.

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So, what is Crypto fear and greed index?

The entire cryptocurrency market is too high on emotions. In the blink of an eye, investors or speculators tend to become too greedy, which is often the result of FOMO (fear of missing out). And in a moment, seeing a host of red numbers on the screen, investors tend to become fearful and irrationally sell their coins (higher the fear, greater would be the selling).

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alternative.me has a very popular crypto fear and greed index, which is widely followed by investors and institutions. It tries to measure these emotional swings in Bitcoin, the bellwether of crypto space in order to provide a quantitative measure of the extent of buying (greed) and selling (fear).

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How is Crypto fear and greed index interpreted?

Like other similar indicators, crypto fear and greed index is also interpreted, based on two common assumptions. When the index is showing very low values, denoting extreme fear, it is generally a sign of an oversold market. The assumption that this excessive fear would not last long and sooner or later the market would revert to its mean, shows a buying opportunity.

Similarly, very high readings on the index show that investors are becoming greedy, hence the market is rising abruptly, making it overbought. The second assumption is, the greed (just as fear) would not last long and probably the marks is due for a correction, which shows a selling opportunity.

Most of the Crypto fear and greed index ranges in a value from 0 to 100, with 0 denoting extreme fear and 100 being extreme greed.

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Benefits of Crypto fear and greed index

History has shown that cumulative investors’ psychology or sentiments do not change much. Hundreds of years back, investors became greedy at the market tops and fearful at the bottoms, which is relevant today as well. Therefore, using a Crypto fear and greed index could improve the decision-making process cryptocurrency trading, especially with respect to the timings of the entry/exit. Primarily, there are two major benefits of a Crypto fear and greed index:

  1. Quantitative measure of sentiments

Measuring an investor’s sentiments is often a difficult task as human sentiments are difficult to quantify. However, the Crypto fear and greed index solves this problem by quantifying the buying and selling decision of all investors, which eventually is a net result of their sentiments. In other words, greed would lead to more buying and fear would eventually translate to selling. By analysing these actions, the sentiments of crypto investors/speculators can easily be measured.

  1. Advanced warning

Cryptocurrencies are often criticised for their erratic and sudden moves. Higher volatility also makes it difficult to predict the market. The Crypto fear and greed index try to solve this problem to some extent by providing advanced warnings as to when the underlying crypto has become overbought or oversold.

When the index has risen to quite extreme values such as 80+ or has fallen to quite a low value such as below 20, it provides a warning in advance that the underlying crypto has probably risen or fallen too much and may be poised for a reversal. This helps to become cautious ahead of the tops and bottoms of the underlying crypto.

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