Explained: Crypto Fear & Greed Index Numbers
The Crypto market is well known for its volatile performance. It gives investors a high risk and enriching environment. Some bold investors make good use of this opportunity, but what about the general population? As curious beings, we might have concerns; is there any definite way of predicting market performance? What should be our baseline for making investment decisions?
Although it’s nearly impossible to predict the market’s overall trajectory, we can have a glimpse of what would be the possible upcoming scenarios? For this purpose, the term Crypto Fear and Greed Index (FGI) is used.
Here’s an introduction to FGI, its working, and how it helps make our decisions.
Introduction to FGI
Crypto/Bitcoin Fear and Greed Index (FGI) is just like CNN’s stocks and shares index used to predict cryptocurrencies with the dominance of Bitcoin. It is just a general foresight of people’s sentiment regarding the market based on several factors like Google trends, social media activity, market volatility, and dominance.
An analysis during the pandemic showed a positive sentimental relationship between people’s mindset and Bitcoin returns. Let’s just consider this analysis, a state of mind affects our decision-making; FGI consists of ratings from 0–100 obtained through internet data and presented in scale form and updates every midnight (GMT).
It’s based on two emotional reactions, Fear and Greed. If we think carefully, our mind is intrigued by these two elements that drive decision-making. It gestures about two assumptions and is marked as 0 for extreme fear and 100 for excessive greed. Intense fear states the worried mindset of investing and provides a buying opportunity; at the same time, extreme greed says the market is due for a correction.
How does FGI Work?
The fear and Greed model includes various factors and is mainly used for Bitcoin because of its premier position, pricing, and sentimental attachment it enjoys overall. Every day, Alternative.me calculates a number by assessing data and comparing it with the past 30–90 days routine. The company is also planning to offer separate indices for other larger coins.
The index’s scales consist of 100 readings, and the data used to calculate the index consists mainly of 5 sources. Let’s have a look at these sources and their weightage.
Volatility (25%) forms an integral part of the index’s composition. It is the current volatility value to an average of the past 30–90 days. It measures uncertainty in the market, and unusual volatility increases are associated with a fearful market.
Volume or market momentum (25%), identical in weightage to volatility, is another factor measured similarly as volatility. An increase in volume predicts greedy market sentiment.
Social media accounts for 15% of the weightage in the list of sources. It refers to social interaction and conversations of people about a specific asset that is Bitcoin in our case. A high interaction rate shows a greedy market trend.
Dominance (10%) in weightage shows coin worth/dominance in the market. An increase in worth accounts for new investments and growth opportunities.
Google trends (10%) show search results by volume and type. It gives an insight into people’s sentiment and trust.
Another factor survey numbered 6th in the list is currently on pause, but initially, its weightage was 15%.
How is FGI helpful?
FGI provides an opportunity to see a glimpse of options in the vast sea of the crypto market. You can say it helps to explore a bit an immeasurable thing. And no doubt, it sounds pretty logical when it comes to fear and greed philosophy. Overall, human decision-making correlates with their state of mind, insecurities, and possible fruitful opportunities.
So we agreed on the fear and greed philosophy, then let’s explore a bit about the benefits of FGI. FGI helps regulate our emotional reactions to critical thinking and making investment decisions. In extreme fear, there might be an opportunity to buy assets, and on the contrary, we have a chance of overnight profit from excessive greed.
Whether it is helpful is not easy to answer because a single factor cannot predict market decisions. It sounds logical to buy “low” and sell “high.” Another possible benefit is that it gives a historical trendline swing by comparing it with the latest data. Assessing its movements, you can take your next move.
It’s valuable because crypto work has no other analogue to monitor its performance. Don’t just rely on a single fact, and also, don’t forget to buy fear and sell greed.
Is it the only option to rely upon?
It’s just one factor out of three: fundamental analysis, technical analysis, and sentimental analysis. You cannot use it as the only factor to make your decision, but it is quite helpful to some extent. It regulates your emotions and gives a bit more understanding during uncertain situations.
Crypto Fear and Greed Index just gives an overview of people’s sentiments. When used in conjunction with other factors, we can benefit from it for a deeper understanding of the market and decision-making. It’s better to opt for doing your own research and analysis before making any decisions!