CNN Business’s Fear and Greed Index for the stock market is an analytical indicator designed to gauge current market sentiment. Several factors are taken into account when creating the index.
The resulting number ranges from 0 (extreme fear) to 100 (extreme greed), with level 50 considered neutral. This indicator is successfully used in other markets, including cryptocurrency.
The cryptocurrency market is characterized by high sensitivity to emotions. This is partly due to the youth of the industry as such, partly due to the huge number of small and inexperienced participants.
In stressful situations, people tend to act irrationally, but still predictably. Bullish trends are usually accompanied by increasing greed, while bearish trends are usually accompanied by fear. That is, the fear and greed index reflects the prevailing mood in the market and helps take into account the psychological factor.
It is then possible to draw conclusions and make estimates to predict future price movements. An example of such behavior is the phenomenon of FOMO (fear of missing out), which is especially evident during significant price changes and pushes market participants to rash actions.
Likewise, technical analysis tools such as trading volumes and historical data can be used to predict future price movements.
If people react in similar ways in certain situations, is it possible to achieve success simply by acting differently than others? Especially if you have a reserve in ThetherUS, which you can partially spend on a promising altcoin. This is where the Crypto Fear and Greed Index can come in handy.
How is the Bitcoin Fear and Greed Index measured?
The assessment of this index is based on several criteria:
Strong fluctuations in the prices of cryptocurrencies, expressed by high volatility, may indicate market instability and a decrease in investor appetite for risk. Stable price development, on the contrary, can be perceived as a sign of greater security.
2. Market momentum and volume
Market momentum measures the speed at which the market accelerates, while trading volume reflects the participation of traders. Market momentum, depending on the direction, can indicate rising or falling sentiment. Higher trading volume indicates more active participation of traders.
3. Social media
Discussions about Bitcoin and cryptocurrency on social media, especially Twitter, can have a significant impact on the market. A strong community or individual celebrity on social media can deliberately or accidentally trigger the “pump and dump” phenomenon. Information, even if it is not always reliable, can influence the decisions of inexperienced investors, causing price changes.
4. Bitcoin dominance
Bitcoin’s share of the total cryptocurrency market capitalization reflects its status as the “king” of the market. Bitcoin’s high share could indicate uncertainty as investors shift from risky altcoins to Bitcoin in search of more stable assets.
5. Google Trends data
Analysis of user interests through Google Trends provides information on search queries related to Bitcoin. An increase in interest is usually accompanied by an increase in search volumes and prices, and historically such changes coincide with cryptocurrency price volatility.
What do extreme indicators indicate?
Extreme fear reflected in the index usually precedes a reversal in cryptocurrency prices towards a bullish trend. This index level indicates low prices, causing panic among investors, leading to sales of crypto assets and further decline in prices. Experienced traders see this as an optimal buying opportunity as crypto assets are likely undervalued. The index effectively predicts changes in cryptocurrency price movements, conveying the anxiety that often heralds a bullish trend.
On the other hand, extreme greed, often caused by the phenomenon of FOMO, indicates an overbought market and overvaluation of crypto assets. This is usually a signal to reduce positions or sell CELO to BNB and other crypto assets.
Historically, the results show that pronounced market sentiment is effective in predicting cryptocurrency price reversals. Pronounced fear in cryptocurrency markets usually gives way to a bullish trend, while extreme greed often precedes a bearish trend.
Is it possible to be guided only by the index of fear and greed?
The cryptocurrency fear and greed index serves as an excellent indicator for predicting the moment of formation of local extremes in cryptocurrency prices and the possible start of a rally. This index is especially valuable in the context of new and short-term changes in the market. In the right hands, this index becomes a valuable tool for determining the timing of changes in market sentiment and the subsequent reversal in cryptocurrency prices. However, it is not enough to create an effective trading strategy.