India now has 15 homegrown cryptocurrency exchange platforms, consisting of more than 10 crore investors. The hype around cryptocurrency is growing and so are the prices of digital coins. But while investing in crypto coins can offer high rates of returns, they are equally volatile and risky.
Investors use a variety of tools to analyze cryptocurrency movement to determine future crypto asset performance. And one of the most commonly used tool is the cryptocurrency trend indicator ‘Fear and Greed Index’.
The Fear and Greed Index is used to measure investors’ sentiments towards the markets. This index reveals whether the market is bullish (high) or bearish (low), and it is constructed based on two opposing emotions, fear and greed.
Alternative. me, the company behind the crypto Fear and Greed Index—analyzes emotions and sentiments from different sources and crunches them into one simple number.
For instance, when the market tumbles, investors are fearful, and when the market is high, greed level increases. The company describes the index in this way: “With our Fear and Greed Index, we try to save you from your own emotional overreactions.” At the time of this writing, the crypto fear and greed index is displaying neutral, with a score of 50.
The crypto Fear and Greed Index runs from 0 to 100. A lower score means there is more fear in the market, meaning that more investors are selling, causing the cryptocurrency market to fall, while a higher one indicates that greed is starting to run rampant. “When Investors are getting too greedy, that means the market is due for a correction,” Alternative. me, notes in a blog post.
Meanwhile, Extreme ‘Fear’ is defined as a score between 0 and 24, and anywhere between 25 and 49 indicates fear in the market. A 50 indicates neutral, and anywhere between 51 and 74 indicates there’s Greed in the market, escalating to Extreme Greed with a score over 75.
“The crypto market behaviour 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 irrational reaction of seeing red numbers,” the company added.
Determining Fear and Greed Index
The company measures the index after gathering information from the following sources.
#Volatility accounts for 25 percent of the index. It measures the current price of the cryptocurrency and compares it with 30 and 90 day averages.
#Market momentum also accounts for 25 percent of the index. This takes the cryptocurrency’s current trading volume and momentum, and compares it with 30 and 90 day averages and then combines the results. “Generally, when we see high buying volumes in a positive market on a daily basis, we conclude that the market acts overly greedy / too bullish,” the company asserted.
#Social media takes up 15 percent of the index. This is calculated by monitoring Twitter hashtags, focusing on the speed and number of interactions on social media. A higher-than-normal interaction rate is taken to mean greedy market behavior. The company says that it is working on adding Reddit to this as well.
#Dominance gets 10 percent of the index share. The dominance of a coin resembles the market cap share of the whole crypto market. Lastly, the crypto Fear and Greed Index initially used surveys as well, but those are paused.
Although the crypto Fear and Greed Index can be a helpful tool in analyzing cryptocurrencies, it cannot be considered a sole factor in making any investment decisions.
Kashif Raza, a cryptocurrency expert believes that investors can rely upon fear and greed index only to an extent. “Before making a decision to buy a trade, investors should always look out for three things, first is fundamental analysis, second is technical analysis, and then sentimental analysis through fear and greed index. “
However, Sharat Chandra, an emerging tech evangelist and a crypto expert does not endorse the Fear and Greed Index at all. “I doubt if anyone can vouch for the veracity of the fear and greed index. Investors should rely on authentic indices such as the S&P Cryptocurrency Indices or S&P Bitcoin index which are designed to serve as benchmarks for the performance of a selection of cryptocurrencies that are listed on recognized, open exchanges while meeting stringent liquidity and market capitalization criteria. Research and data available on Glassnode and Messari can be accounted for to make informed decisions on portfolio allocation,” added Chandra.
Disclaimer: Cryptocurrency is an unregulated space and digital currencies are not backed by any sovereign authority. Investing in cryptocurrency comes with market risks. This article does not claim to provide any kind of financial advice for trading or buying cryptocurrency.