Understanding the crypto fear and greed index

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sounds familiar?...maybe, maybe not...

As we all know, being driven by emotions is generally a basic characteristic of all humans- That's what mostly drives our interactions on a daily basis. And thus, most people tend to act in predictably similar manners when approached by certain situations.

When it comes to trading as well, it's no doubt that emotions basically drive the markets;

when there is fear, prices crash

when there is greed, prices rise

WHAT IS THE FEAR AND GREED INDEX?

Well, while there is not really much of a 'perfect definition', the crypto fear and greed index is more of a tool used by some investors to gauge the market. It is based on the premise that excessive fear can result in more people selling and the market falling while excessive greed can lead to more investors buying causing a skyrocket in prices.

A very common tool to help quickly determine this index is the crypto fear and greed index.

HOW THE CRYPTO FEAR AND GREED INDEX IS MEASURED

According to alternative, The crypto fear and greed index is measured based on certain factors which are generally just focused on Bitcoin's price movements for now. These factors include;

Volatility (25 %)

The current volatility and maximum drawdowns of bitcoin are measured and compared with the corresponding average values of the last 30 days and 90 days. Thus, an unusual rise in volatility is a sign of a fearful market.

Market Momentum/Volume (25%)

Generally, when high buying volumes are noted in a positive market on a daily basis, it is concluded that the market acts overly greedy / too bullish.

Social Media (15%)

On Twitter, posts on various hashtags for each coin (publicly, only those for Bitcoin are shown) are gathered and counted and checked for how fast and how many interactions they receive in certain time frames. An unusually high interaction rate results in a grown public interest in the coin and that usually corresponds to greedy market behaviors.

Surveys (15%)

Data is also usually collected via surveys, although...this method is currently paused.

Dominance (10%)

The dominance of a coin resembles the market cap share of the whole crypto market. Especially for Bitcoin, it is thought that a rise in Bitcoin dominance is caused by a fear of (and thus a reduction of) too speculative alt-coin investments since Bitcoin is becoming more and more the safe haven of crypto. On the other side, when Bitcoin dominance shrinks, people are getting more greedy by investing in more risky alt-coins, dreaming of their chance in the next big bull run.

Trends (10%)

Data from Google trends searches are also studied for analysis.

HOW TO USE THE FEAR AND GREED INDEX

In most situations, it can be deduced that most people tend to make trading decisions based on certain sentiments. From instinctive wits to 'going with the flow' as well as through thorough and selective research- Whichever way, there is always an outcome.

These Outcomes could either yield market hikes or worst still, market crashes in general. A good way to leverage situations of excess fear or excess greed could be to move contrary to the general public market opinions.

How? When people tend to get greedy as a result of market hikes, this results in FOMO (Fear of missing out)...This could be a good time to sell in most cases because as a common saying goes

'what goes up, must surely come down'

Also, when investors begin to sell massively and the market crashes, this could be a very good buying opportunity as most people are generally scared to put in money to buy.

CLOSING THOUGHTS

Warren Buffet says- 'Be fearful when others are greedy and greedy when others are fearful'

Most times, extreme fear can be a sign that investors are too worried- That could be a buying opportunity. And when Investors are getting too greedy, that means the market is due for a correction and a crash could set in very soon.

Thank you for taking your time to read this, Kindly let me know what you think in the comments! :)