The cryptocurrency market is known for its volatility. Prices can swing wildly from day to day, sometimes by double-digit percentages.
This creates a challenging environment for investors looking to time the market. How can you tell if investor sentiment is leaning more towards fear or greed at any given moment? One useful tool is the Cryptocurrency Fear and Greed Index.
What is the Fear and Greed Index?
The Fear and Greed Index is a tool that gauges current sentiment in the cryptocurrency market on a scale of 0 to 100. 0 represents “Extreme Fear” while 100 represents “Extreme Greed”.
The index incorporates volatility, market momentum, social media activity, surveys, dominance, and other factors to calculate a value indicating how fearful or greedy investors are behaving.
The index was created in 2018 by Alternative. me, a company that develops various crypto data tracking tools.
It is inspired by the stock market’s Fear and Greed Index, which has been published by CNN Money since the 1990s.
Just as with stocks, EXTREME fear can indicate a good buying opportunity during a cryptocurrency bear market, while EXTREME greed could signal a market top and impending correction during a bull run.
Monitoring the index can help investors understand when markets may be overextended or undervalued.
How It Works
The Cryptocurrency Fear and Greed Index algorithm takes into account 5 factors when calculating the index value each day:
| Volatility (25% weight) | Measured as the deviation of daily price changes over the past 30 and 90 days |
| Market Momentum (25% weight) | Measured as the magnitude of recent daily price changes and volume changes |
| Social Media (15% weight) | Analyzes posts on various crypto Reddit forums for signs of fear or greed |
| Dominance (10% weight) | Compares Bitcoin dominance to its historical average |
| Surveys (25% weight) | Incorporates crypto fear and greed survey data from multiple sources |
Each factor is calculated as a value from 0 to 100 and then weighted to determine the final index value. The various factors ensure the index captures both quantitative market metrics as well as qualitative sentiment data.
Historical Look at the Index
Since its inception in early 2018, the Cryptocurrency Fear and Greed Index has fluctuated between the “Extreme Fear” and “Extreme Greed” zones many times.
Looking back helps illustrate how market tops and bottoms have correlated to extreme index values.
| Early 2018 | The index shows high greed during Bitcoin’s rally to its $20k all-time high. It peaked at 94 on January 7, 2018, just 5 days before Bitcoin’s apex. It then plunges over the next six months as the crypto bubble pops. |
| March 2020 | The coronavirus crash drives the index down to 10, showing extreme fear as Bitcoin trades under $4k. Within two months, bitcoin doubled in value. |
| November 2021 | As Bitcoin and Ethereum hit new highs, the index reached a yearly peak of 95 in November 2021, signaling extreme greed. A 50% market correction followed over the next two months. |
| June 2022 | The monumental collapse of the Terra ecosystem tanks the markets, sending the index back down to 10. The extreme fear reading presaged a major rebound over the next six weeks. |
These examples demonstrate how exceptionally high or low index values have coincided with significant trend changes in the crypto markets. While not a crystal ball, monitoring the Fear and Greed Index provides perspective on when assets may be overbought or oversold.
Current Snapshot (February 2024)
As of February 12, 2024, the Cryptocurrency Fear and Greed Index stands at 22, in the “Extreme Fear” zone. This means sentiment is currently quite bearish and pessimistic.
Factors contributing to this reading include:
Looking at the history of the index, readings below 20 tend to be reliable contrarian indicators that a market bottom may be close.
However, extremes in fear or greed can persist for weeks before a definitive trend changes. Patience and prudent position sizing are still warranted.
Uses for Traders and Investors
Monitoring the Fear and Greed Index can assist both short-term traders and long-term investors:
Of course, the Fear and Greed Index is just one metric to incorporate into any trading or investing approach. It should be combined with sound technical and fundamental analysis.
Just because an asset is oversold doesn’t guarantee a bounce. And overbought conditions can persist longer than seems reasonable during parabolic rallies. Using the index with other indicators creates a more robust approach.
Crypto Fear and Greed Index: A Useful Tool For Crypto Traders
Monitoring the daily changes in the Cryptocurrency Fear and Greed Index provides a useful method to identify periods of excessive bearish or bullish sentiment in the crypto markets.
History has shown that extremes in the index often coincide with major trend turning points. While not foolproof, integrating readings from the index into trading and investing strategies can provide another data point to consider when making decisions.
As legendary investor Warren Buffett famously advised regarding volatile markets:
“Be fearful when others are greedy and greedy when others are fearful.”
The Cryptocurrency Fear and Greed Index offers a tool to help gauge the general level of fear or greed in crypto markets at any given time.
