The Crypto Fear and Greed Index tracks sentiment in the cryptocurrency market and is similar to CNN Money's Fear and Greed Index used for traditional markets. The Crypto Fear and Greed Index ranges from 0 to 100 and indicates whether the market is fearful or greedy.
You may be familiar with the Wall Street Cheat Sheet, which charts out different stages of the market cycle based on the collective psychology of traders and investors:
We can also simply things to focus on two of the most prevalent emotions in trading: fear and greed.
Since the cryptocurrency market is driven by human emotion just as the stock market is, when investors start to become greedy, it tells us that the asset is becoming overpriced and a correction is due. Market tops are associated with greed. The index score tries to capture this with readings between 55 and 100 when the emotion of greed is prevailing. The closer the index score is to 100, the more greedy market participants are suggested to be.
On the other hand, the bottoming stage of the market cycle is associated with fear, which is represented by an index score below 45. The closer to zero the index score is, the more fearful investors are suggested to be. Index values near 50 indicate neutral conditions.
How the Crypto Fear and Greed Index Works
Created by Alternative.me, the Crypto Fear and Greed index has six components (although at the time of writing only five are being used).
Each of the component’s weight in the Crypto Fear and Greed Index is displayed in the list below, along with a description of what they cover:
- Volatility (25%): this component compares the current volatility and maximum drawdowns of bitcoin with the average values over the past 30 days and 90 days. Higher than usual volatility is seen as a sign of a market dominated by fear.
- Market momentum/volume (25%): Current volume/momentum is compared with the average over the past 30 and 90 days, as with the volatility component. When there's high buying volume and strong upward momentum, the market is indicated to be greedy.
- Social media (15%): Analysis of Twitter to determine sentiment in the marke using hashtags for each coin, the responsiveness of interactions and how frequently they occur. A spike in social media interaction points to growing public interest of the coin and is considered as a sign of a greedy market.
- Dominance (10%): Bitcoin's dominance (bitcoin market capitalisation divided by the total cryptocurrency market capitalisation) is used to show whether the market is fearful or greedy. It's taken as a sign of fear when there is a rise in Bitcoin dominance since there is a reduction in speculative altcoin investments. Conversely, when Bitcoin dominance falls, it suggests greed is more dominant as there are more funds flowing to altcoins, which are riskier.
- Google Trends data (10%): the data for Bitcoin related search queries, such as popular searches and changes in search volumes, are taken from Google data to form this component of the index.
Usually, surveys (15%) are also included in the index calculation, but these are currently paused. In conjunction with strawpoll.com, weekly crypto polls are used to gauge sentiment amongst a large group of crypto investors.
The Crypto Fear and Greed Index is updated several times per day and you can find out when the next update will be on their website:
Charting the Crypto Fear and Greed Index
The Crypto Fear and Greed index can be added to TradingView charts.
The chart below shows the price of BTC-USD along with the Crypto Fear and Greed Index. The indicator shows a red/green background when the market is in extreme fear/greed mode. The brighter parts of the background fill show when the Index has indicated more intense stages of fear/greed:
Typically, when the Crypto Fear and Greed Index has reached extreme low points (i.e., values below 20) this has usually marked lows in the price of bitcoin. For example, in December 2019 the Crypto Fear and Greed Index fell as low as 15 as BTC-USD touched the mid-$6,000s. After the lows in both the Crypto Fear and Greed Index and the price, BTC-USD rose steadily and was above $10,000 by February 2020.
While the Index is often associated with major turning points in the market, it can sometimes give false signals. We look to late August 2019 to illustrate as an example.
The Crypto Fear and Greed Index went below 10 which would suggest it was a great time to buy. The price of bitcoin was around $10,000. However, the market proceeded to head lower in the following weeks. It wouldn’t have turned out to have been a profitable signal as the market reached the $8000 handle by September 2019.
Therefore, the Crypto Fear and Greed Index will not catch all tops or bottoms.
Even though you might have gone long in December 2019 when the low of 15 was reached, the Crypto Fear and Greed Index would not have given any signal to exit the position. As the price reached a ceiling above $10,000 in February 2020, the Crypto Fear and Greed Index didn't reach levels that have corresponded with previous tops, reaching a high of 65.
Since it's just another tool for traders, the Crypto Fear and Greed Index shouldn't be heavily relied upon. If you choose to use it, the Index's readings should compleother indicators or analyses should supplement the Index's readings.
Nevertheless, the Index is useful since it's a simple metric and can provide value by confirming other analyses or signals. Given that the Index is updated two or three times per day, it is more useful for long-term traders, but is probably less valuable to scalpers and short-term traders.