The crypto greed and fear index is a quantitative analysis of the emotions and sentiment expressed towards bitcoin and other crypto currencies within the market. The purpose of the crypto greed and fear index is to show real time and historic attitudes towards crypto price predictions from traders, investors and analyzers.
The crypto fear and greed index is built upon two simple assumptions:
Fear
If the index indicates extreme fear, it represents that investors are worried. This is often interpreted as a buying opportunity as investors are likely to be selling off their assets. On the crypto fear and greed index, a score of between 0 - 24 is labeled as extreme fear, whilst a score of 25 - 49 represents fear.
Greed
If the index shows extreme greed, this is often interpreted that a price correction is due, with many investors seeing this as a sign to sell when the crypto currency is overvalued. An index score of 50 - 74 represents greed, whilst a score of between 75 - 100 is labeled as extreme greed.
What is the purpose of the crypto greed and fear index?
The primary purpose of the crypto fear and greed index is to give traders a tool to analyze the crypto market without being clouded by their own emotional biases and overreactions.
The index does not have a one-to-one relationship with price changes, so it is important that traders devise their own trading strategy based off of the crypto fear and greed index, rather than interpreting a movement of the index as a direct signal to either buy or sell currency.
Many traders use the index to indicate when they should either enter, exit or hold their positions in the market.
Key features of the crypto fear and greed index:
- Measures the crypto sentiment of traders
- Calculated using several indicators such as market volatility, trading volume, social media sentiment and market cap
- Categorises crypto sentiment into either extreme fear, fear, greed or extreme greed
- Shows current and historical crypto sentiment
- Does not have a direct correlation with price changes
- Designed to help traders make informed decisions using quantitative measures
How is it calculated?
Most fear and greed indexes are calculated on a scale of 0 to 100, with 0 representing extreme fear and 100 being extreme greed. There are multiple data sources used to calculate the crypto greed and fear index, these being:
Market Volatility
Volatility is a measure of the realized variance of crypto, examining the difference between the peak-to-trough decline or trough-to-peak of the crypto price. This rolling average is then compared to the corresponding average values of the last 30 and 90 days. An increased market volatility is associated with a more fearful market as there is less predictability.
Market Volume
The volume of trades is also used to calculate the fear and greed index. When price rises are positive and there is a high buying volume, this is concluded to show a bullish, greedy market.
Social Media Sentiment Analysis
By processing and analyzing topics discussed on social media in real time, you can spot market opinion trends. When there is a sudden, unusually high interaction rate with certain coins, it is often interpreted to show that traders are getting greedy.
Market Cap Share
The market cap is the total value of all of the mined coins of a specific cryptocurrency. A change in the market cap is interpreted differently for a ‘stable’ coin such as bitcoin as it is for a relatively unknown alt-coin. As bitcoin is seen as the safest haven within crypto, a rise in the bitcoin market cap is seen as a fearful sign as there is an associated decline in the speculative alt-coin investments. Inversely, should the market cap rise for alt-coins, it indicates investors are getting greedier, chasing a big bull run.
Google Trends
The search engine queries like Google’s are used to give an insight into the mindsets of investors and traders. If searches such as ‘how to buy crypto’ are growing in popularity, it is interpreted to show growing greediness, whereas searches such as “is bitcoin being manipulated” show more fearful attitudes from traders.
Is the crypto fear and greed index reliable?
The crypto fear and greed index has not previously correlated with long-term bull runs. However, it does react in realtime to short-term opinions, news and events. Many traders will use the index as a short-term indicator as part of a wider trading strategy, as opposed to relying on the index in isolation.
The index should not be used as direct financial advice, and you should always conduct your own due diligence and research before investing in crypto currencies.
Origins of the index
The original crypto greed and fear index was developed by alternative.me, and originally focused on bitcoin. The original stock market fear and greed index was developed by CNNMoney, and used 7 fear and greed indicators:
- Market momentum
- Stock price strength
- Stock price breadth
- Put and call options
- Market volatility
- Safe haven demand
- Junk bond demand
Market momentum
Market momentum compares the stock market levels compared to where they have been over the past few months, by analyzing current levels against a 125 trading day average. The CNN Fear & Greed Index uses slowing momentum as a sign of fear, and growing momentum to indicate greed.
Stock price strength
As a few big stocks can skew the returns across the market, it is important to understand how many stocks are doing well in proportion to how many stocks are performing poorly. Stock price strength compares how many stocks are at a 52-week high compared to those at a 52-week low. When there are more highs than lows, it is interpreted as a bullish sign that traders are greedy.
Stock price breadth
Stock price breadth measures the volume of shares that investors are actively buying and selling, by looking at the number of shares rising compared to the number of shares that are falling. A decreasing trading volume is a signal associated with fear.
Put and call options
Puts are options to sell, whilst calls are options to buy. When the ratio of puts to calls rises, this is a signal of fear. A ratio above 1 is considered bearish.
Market volatility
The CBOE Volatility Index, or VIX, is the most well-known measure of market sentiment, and it measures expected price fluctuations over the next 30 days. Increasing market volatility is used as a signal of fear.
Safe haven demand
Bonds are safer than stocks. Safe haven demand is a measure of the difference between treasury bonds and stock returns over the past 20 trading days. An increasing safe haven demand is a signal of fear.
Junk bond demand
Junk bonds carry an increased risk of default. Bond yields decrease when prices go up. A smaller spread between yields of junk bonds and government bonds is a sign investors are taking on more risk. Junk bond demand is therefore taken as a signal of market greed.
Utilizing the index
The fear and greed index, whether for crypto or stocks and shares, should be used as an analytical tool as part of a wider trading strategy including other tools such as fundamental analysis and sentiment analysis.
StockGeist.ai gives traders the ability to monitor over 2,200 + publicly listed companies, and a wide range of crypto currencies in realtime, understanding the opinions and moods expressed towards these stocks, shares and coins by investors.
To stay ahead of the market price swings, check out our crypto sentiment analysis or crypto API, or alternatively our stock sentiment analysis or our available stock market API.
