When it comes to cryptocurrency, the words fear and greed are pretty much synonymous. On one hand, people invested a little bit of money because someone told them it was cool but sold as soon as coin prices started to dip. On the other hand, the day-traders are pumping and dumping shitcoins over the past few months in search of that elusive golden Lambo. They expect it to come overnight, not adding to crypto’s credibility when these coins, sooner rather than later, have the rug pulled.
Fear and Greed Index in traditional trading
But you may not know that the term ‘fear and greed’ actually consists of a real index. The fear and greed index is used in traditional trading to help measure the stability of the market. It helps investors to decide whether it’s a good time to buy or sell their assets.
CNN Money developed this Fear and Greed index using the following seven different indicators;
- Stock Price Momentum: The S&P 500 (SPX) versus its 125-day moving average
- Stock Price Strength: The number of stocks hitting 52-week highs and lows on the New York Stock Exchange
- Stock Price Breadth: The volume of shares trading in stocks on the rise versus those declining.
- Put and Call Options: The put/call ratio, which compares the trading volume of bullish call options relative to the trading volume of bearish put options
- Junk Bond Demand: The spread between yields on investment grade bonds and junk bonds
- Market Volatility: The VIX (VIX), which measures volatility
- Safe Haven Demand: The difference in returns for stocks versus Treasuries
With a computer taking an average of the seven indicators, it uses a scale between 0 to 100. Anything under 49 indicates a market of fear whereas anything up at 51 shows that the market is greedy. Just like in a bear market where you are encouraged to ‘buy the dip‘. When the traditional market is in the fear bracket, many traders take this as a sign of a good buying opportunity, whereas anything in the greed bracket is an excellent time to sell.
Fear and greed index in crypto
It was only a matter of time before a similar system was developed for the cryptocurrency market. The platform alternative.me developed the Bitcoin fear and greed index to “analyze emotions and sentiments from different sources and crunch them into one simple number.” On its website it lays out why the fear and greed index is a perfect tool to use to monitor buying behaviour, stating – “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 the irrational reaction of seeing red numbers”.
Like the CNN Money index, it uses data from different sources to monitor market sentiment.
But let’s list all the different factors we’re including in the current index:
- Volatility: measuring current volatility and the maximum drawdowns of bitcoin, comparing it to the average values over the past 30 and 90 days.
- Market Momentum/Volume: measuring the current volume and market momentum in comparison with the last 30-90 average day values.
- Social Media: Twitter analysis, counting posts with various hashtags for each coin, checking how many interactions they receive in certain timeframes.
- Dominance: alternative.me puts forward that when Bitcoin is dominant it is caused by people using it as a ‘safe’ coin, indicating a fear of alt-coins. When Bitcoin loses this dominance, it indicates people are getting more greedy, investing in more risky alt-coins.
- Trends: Google Trend data for Bitcoin-related searches, both search volume and recommended popular searches.
Analysing fear and greed in crypto
Using a mixture of this inputted data, they analyse and report whether the market is in a fear or greed state. For example, last month (May 2021) the reported number was 14 indicating the market was in a state of extreme fear, whereas last week (14th June 2021) the number was higher, at 38, moving the state up to ‘fear’. Currently, at the time of writing (W/C 21st June) the market is back in a state of extreme fear. If you want to monitor fear and greed live changes, feel free to check CoinSocialStory price prediction section. There’s a newly added fear and greed tool on each coin’s page.
An important factor to note with the crypto fear and greed index is that it currently only monitors the market in relation to Bitcoin. Right now in the stage of pre-mass adoption, we are reliant on Bitcoin as an indicator of how healthy the crypto market is. However, over the next few years as more coins with strong utilities begin to have an uptake in adoption, we will see Bitcoin’s dominance and impact on market volatility slowly decrease.