The cryptocurrency market has been on a roll lately, and many investors are looking to get on the wealth ladder. Today, we're going to explain what the Fear & Greed Index means and how to check it, which is a must-know for investors new to the digital asset market!
What is the Fear & Greed Index?
Every investment market in the world is driven by human emotions. When we hear about someone making a lot of money investing, we get sick to our stomachs (?) and get FOMO. When we put aside our rationality and invest based on our emotions, we lose a lot of money. The Fear & Greed Index is designed to measure the unstable psychology of investors. The Fear & Greed Index is widely used to analyze the thoughts, feelings and reactions of market participants. It was first developed by CNN Money in 2012 to measure the various uses of stock market sentiment, and has since been applied to the cryptocurrency market.
How is the Fear and Greed Index calculated?
The index represents a total number from 0 to 100, with 0 representing fear and 100 representing greed. The Fear Greed Index is divided into five levels as shown below.
1-24: Very Fearful, 25-49: Fearful, 50: Neutral, 51-74: Greedy, 75-100: Very Greedy
The Very Fearful stage is characterized by high volatility, high volume, and a decline followed by massive selling, also known as panic cells. Fearful is when the index is in a gradual decline: price becomes more volatile, volume increases, and a short-term bottom may form. Neutral is a situation where participants find psychological resistance and support. In a liquid market, this is a critical period for short-term price movements. Greed is a gradual rise in the index, with higher prices and possible short-term tops. Very greedy conditions mean high volume and high volatility.
How is the index measured?
The Fear and Greed Index is based on volatility (25%), social media mentions (15%) and surveys (15%). It is also calculated using bitcoin market capitalization (10%) and Google search volume (10%). The recent bull market of 2021 was a period of extreme greed, with the index often exceeding 90. We are currently in a period of fear.
So what should I do with the Fear Greed Index?
Extremely high levels of fear usually predict an upward reversal in crypto prices, as high fear leads to oversold prices, which are then pushed higher as people who have been waiting for a bargain buy the dips. Fear markets are seen by many traders as a land of opportunity, where they can buy undervalued cryptocurrencies and sell them at the best price. However, now that we're in the greed phase, many people are experiencing FOMO. In the case of extreme greed, the bubble may burst, which means it's time to switch assets before the market turns upside down. Of course, the Fear & Greed Index is a tool to help you build your own portfolio, but don't take it at face value! Stay tuned for the next part of our series on the Fear & Greed Index for crypto investors.