Cryptocurrency is a highly volatile asset, mostly due to the speculative nature of investments. India alone has over 10 million users while the number of global crypto investors has reached 106 million in January 2021, according to a report by Crypto.com. “The behaviour of the cryptocurrency market 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 (an) irrational reaction (to) seeing red numbers,” says Alternative.me, the company that has come up with the Crypto Fear and Greed Index to analyze emotions and sentiments from different sources and quantifies them.
What is the Fear and Greed Index?
Based on a measurement of investors’ sentiments towards the market, the Crypto Fear and Greed Index indicates whether the market is bullish (high) or bearish (low). ‘Extreme fear’ means that investors are very worried, but it could also mean that this is a buying opportunity. When the index indicates that investors are getting too greedy, that means the market is due for a correction, as per alternative.me.
How Does It Work?
The crypto Fear and Greed Index has scores in the range of 0 to 100. A lower score indicates more fear in the market (the score appears in red), which means more investors are selling, causing the cryptocurrency market to fall. A higher score means that greed is high (scores appear in green) and people are buying. “When investors are getting too greedy, that means the market is due for a correction,” Alternative.me states in a blog post.
'Extreme Fear' is defined as a number between 0 and 24; a 25-49 score indicates 'fear' in the market. A score of 50 suggests a neutral condition. A score of 51-74 indicates 'greed' and a score of 75 to 100 means 'Extreme Greed'.
What Is The Index Made Up Of?
Fear and Greed Index collects information based on volatility, volume, social media posts, and coins' dominance, according to Alternative.me.
Volatility accounts for 25 per cent of the index. The current volatility and maximum drawdowns of Bitcoin are taken and compared with the corresponding average values of the last 30 days and 90 days. An unusual rise in volatility is a sign of a fearful market, according to alternative.me.
Market volume or momentum also forms 25 per cent of the total weightage. The current volume and market momentum are measured, and compared with the last 30- and 90-day averages. If there are high buying volumes in a positive market on a daily basis, the market is considered greedy or too bullish.
Social media posts are important contributors to the frenzy in cryptocurrencies. Social media carries 15 per cent weight in the index. This data is estimated by tracking Twitter hashtags and focusing on the pace and amount of social media interactions, according to Alternative.me.
Dominance has 10 per cent of the index's weightage. A coin’s presence or share in the market cap of the entire crypto market is its dominance.
According to Alternative.me, they also pull Google Trends data for various Bitcoin-related search queries and quantify them. They especially track the change in search volumes and other currently popular searches.
Is The Index Trustworthy?
The Fear and Greed Index helps understand the crypto market condition to some extent. But any decision to invest, hold or withdraw cannot be based only on the index. Also look out for things such as fundamental analysis and technical analysis advises Kashif Raza, founder of Bitinning, an online platform focussed on crypto awareness.
"While the index represents the current sentiment, it is not an accurate predictor of future market movements. For example, the index showed ‘Extreme Greed’ (>90) in November 2020, which typically means that investors should book profits. However, Bitcoin and the crypto market continued to post newer highs over the next six months,” says Vikram Subburaj, co-founder and CEO, Giottus Cryptocurrency Exchange. Subburaj advises investors to look at other technical metrics in conjunction with the Fear and Greed Index to understand how the market may behave in the near future.
On January 10, 2022, Crypto Fear and Greed Index is 23, which indicates ‘Extreme Fear’ according to alternative.me.