Bitcoin Fear and Greed Index: Buy In Fear, Sell In Greed
Key Questions Answered
- The Bitcoin Fear and Greed Index measures the overall crypto market sentiment. It is derived from the Stock Fear and Greed Index.
- Understanding the Fear and Greed index can help investors identify the right time to buy or sell Bitcoin.
- When the market is extremely fearful, it may signal a buying opportunity; when it is extremely greedy, it may be a good time to sell.
Greed, fear, and herd mentality are three elements that have always been present in all financial markets. The overwhelming presence of any emotion is usually a precursor to a bull or bear market. Analysts have always looked at fear or greed levels to hypothesize on the direction of the market. These indexes are also heavily researched to explore investor rationality.
What is the Fear and Greed Index?
The Fear and Greed Index is a tool that measures the overall psychology, or market sentiment, in the stock markets. It was developed by CNNMoney to measure two of the primary emotions that influence investors–fear, the emotion that makes traders panic-sell, and greed–the emotion that makes traders buy at all-time highs.
A fear and greed rating of:
- 0 to 49 indicates fear in the market
- 50 indicates a neutral market
- 51 to 100 indicates greed in the market
As such, investors can use these indexes to help determine if the market is fairly priced, and from this decide if it is the right time to buy or sell. This is because fear tends to drive down prices, and greed drives up prices.
Today, there are two main kinds of Fear and Greed Indexes–the Stock Fear and Greed Index for the stock markets, and the Bitcoin Fear and Greed Index for the crypto markets.
How to Use the Fear and Greed Index?
Both extreme fear or greed can lead to profitable buying or selling opportunities. As such, the Fear and Greed Index is commonly used as a market timing tool. Like the Sage of Omaha (Warren Buffet) once said, “Be fearful when others are greedy and greedy when others are fearful.”
The guidelines below apply to both the stock and crypto markets.
When the Index reads 0 to 49:
- The market is in fear; the lower the number, the more fearful investors are.
- As investors stay away from putting money into the market out of fear, this suppresses the price. This could mean that the stock or crypto is undervalued at the moment.
- It could be a buying opportunity.
When the Index reads 51 to 100:
- The market is greedy; the higher the number, the greedier investors are.
- As price keeps getting pushed higher and higher by hype and FOMO–the fear of missing out, this could indicate that a stock or crypto is overvalued and a dip or a correction to more neutral levels will happen soon.
- This may be a good time to sell.
In addition, the Index reminds traders of their own emotions, as even the experienced ones can get irrational when seeing the price charts awash in red candlesticks, or green candlesticks.
“With our Fear and Greed Index, we try to save you from your own emotional overreactions,” states the creators of the Bitcoin Fear and Greed Index.
What Is The Crypto Fear and Greed Index?
As all cryptocurrencies rise and fall on the price of Bitcoin, the dominant cryptocurrency in the market, the Bitcoin Fear and Greed Index can be used to gauge the sentiment of the overall crypto market.
Speculating in the crypto market is especially risky and psychologically demanding, as it is even more volatile than stocks. The fact that it is still an unregulated market also makes it subject to higher degrees of market manipulation than in the stock market.
Therefore, it is not uncommon for investors to get emotional in the process. Such indicators reveal the market’s general sentiment to help traders determine when to take riskier positions and when to play it safe.
What is the Stock Fear And Greed Index?
When it comes to stock trading, CNNMoney’s Fear and Greed index is a widely used tool by traders in all the global leading stock markets from the New York Stock Exchange (NYSE) to Nasdaq, London Stock Exchange and Hong Kong Stock Exchange.
The index displays results on a scale of 0 to 100, with 0 being maximum fear in the markets. This is when there is massive sell-off, leading to price plunges. At 100, the market is blinded by greed and stock prices are at sky high levels.
Fear is currently driving the US stock market (Source: CNN Business)
Bitcoin Fear and Greed Index Today
Live readings of the Bitcoin Fear and Greed Index can also be obtained from Alternative.me.
How to Check Bitcoin Fear and Greed Index?
Besides the above website of the Bitcoin Fear and Greed Index from Alternative.me, which provides values yesterday, last week, and last month, you can also follow the Bitcoin BTC Fear and Greed Index Twitter account, which gives updates of the index in your Twitter feed.
BTC Fear and Greed Index historical chart overlaid with BTC price (Source: LookintoBitcoin)
In addition, there is another great resource, the Fear and Greed Historical Chart from Look Into Bitcoin which not only shows the Bitcoin index score over time, but also overlays it on top of the price of Bitcoin on the chart.
The benefit of this, explains its creators, is that it allows you to see not only the current score but also to see how the score has changed with price over time.
BTC Fear and Greed Index historical chart overlaid with BTC price (Source: LookintoBitcoin)
Who Created the Bitcoin Fear and Greed Index?
The Bitcoin Fear and Greed Index, which derives from its traditional counterpart, the Stock Fear and Greed Index, was created by a two-man team of web developers Gregor Krambs and Victor Tobies at Alternative.me.
They developed the Index to meet a market need–as there simply did not exist a tool to take the temperature of the crypto market. The index began measuring investor sentiment in the crypto markets on 1 February 2018.
How are Fear and Greed Calculated in Traditional Markets?
Generally, the traditional fear and greed index is calculated based on the values of six key indicators, namely the following:
- Market Momentum: The market momentum indicator critically analyzes the ratio of stocks appreciating to the ones depreciating. It also explores the volume of shares nosediving versus the volume of shares skyrocketing. For example, examining how far the S&P 500 has risen or fallen in the last 100 days provides a good indication of momentum.
- Stock Price Strength: The Stock Price Strength indicator looks at the number of stocks hitting highs against the number of those hitting lows within a period of 52 weeks.
- Stock Market Options: The Stock Market Options indicator analyzes the ratio of “put” to “call” options. When “put” options fall behind “call” options, it connotes greed. However, when “put” options surpass “call” options, it signifies fear in the market.
- Market Volatility Index (VIX): This indicator is a real-time index that represents the market’s expectations for volatility over the next 30-day period. When the VIX is high, the index signals fear, but when stocks rise and the VIX drops, it indicates greed in the market.
- Junk Bond Demand: This measures the rate at which traders invest in high-risk assets (referred to as junk bonds). When investors adopt this trading strategy, it is an indication of greed in the market.
- Safe haven demand: Demand for safe-havens is a strong fear indicator. In times of uncertainty, investors seek to store their money in the least risky assets they can find. The Safe Haven Demand index measures the rate at which investors adopt safer strategies as they search for low-risk investments.
Each one of these indicators is measured on a scale of 0 to 100. The fear and greed index is then calculated as the average score of the six.
How are Crypto Fear and Greed Indexes calculated?
When it comes to crypto fear and greed indexes, we only need to look at the Bitcoin Index. This is because altcoin markets are highly correlated to Bitcoin’s movements. When the price of bitcoin surges, altcoins follow soon after. When Bitcoin’s price falls, so will most other altcoins’.
The Bitcoin Fear and Greed index can be calculated with the following 6 components:
- Volatility (25%): An unusual increase in volatility signifies extreme fear in the crypto market.
- Volume (25%): Consistently high trading volumes correspond to a greedy market.
- Social Media (15%): Twitter sentiment can be determined by measuring posts, mentions, and activity on crypto-related hashtags. An unusually high Twitter presence signifies a greedy market.
- Surveys (15%): Many polls are conducted on various platforms, asking users how they feel about the current market.
- Bitcoin Dominance (10%): The higher the Bitcoin dominance (BTCD), the more fearful the market, as they seek to park their funds in “safer” cryptos as compared to altcoins. When funds shift to altcoins, it signals that the market is acting greedier as altcoins have given higher returns than Bitcoin in the last few years.
- Google Trends (10%): Google trends data for various bitcoin-related search queries are incredibly indicative of how investors are feeling. For instance, a surge in search volume for “best bitcoin investment” is an obvious indicator of extreme greed.
How Accurate Is The Fear And Greed Index?
The Fear and Greed index is not 100% accurate, nor is it always useful to make predictions with. In other words, it only shows current market sentiment, and any decisions on future investments will require confirmation from other technical indicators.
Additionally, though extreme greed or fear may signal an upcoming reversal, it is impossible to predict how long the market can stay in either of those conditions. As always, you must conduct your own research, practice, and backtest to ensure any trading strategy using this indicator is actually profitable.