Wondering what the Crypto Fear and Greed Index is and how to use it? We've got everything you need to know in our Crypto Fear & Greed Index guide for 2023. 😱🤑
The Crypto Fear and Greed Index is a metric that gauges market sentiment on a daily basis. It uses a combination of social signals and market trends to determine the overall sentiment of crypto investors.
You can see an example of the Crypto Fear and Greed Index below:
It's all well and good knowing what the Crypto Fear and Greed Index is, but doesn't help if you don't know what the purpose of a Fear & Greed Index is.
The crypto market is volatile, and the market changes are often driven by the emotional behavior of investors.
In crypto slang - we're talking FUD and FOMO. When there's FUD (fear, uncertainty, and doubt), there's fear. Many investors may be selling.
On the other end of the scale, when there's FOMO, there's greed. Investors have seen prices skyrocket and they want to hop on the rocket to the moon. Many investors may be buying.
The Crypto Fear and Greed Index generates a single value, between 1 and 100, with 1 representing extreme fear and 2 representing extreme greed. You can see how the sentiment breaks down into four rough categories and the values below:
As you can see, anything below the value of 24 represents extreme fear, while anything above the value of 75 represents extreme greed.
Why does all this matter? Because it might help you figure out opportunities to invest, or take profits. It all comes down to understanding the impact fear and greed have on the crypto market
Understanding why and how to use the Crypto Fear and Greed Index starts with understanding what fear and greed can mean in the market.
When fear is the dominant emotion in a given market, investors are fearful about losing their capital.
Fear in a market is usually associated with a bear market and prices falling - regardless of the reason. It could be general economic factors like inflation or recession, or it could be due to specific market events like the FTX collapse - where the Crypto Fear and Greed Index unsurprisingly was in extreme fear for some time throughout the fallout as investors sold in fear of prices dropping even further.
On the other end of the scale, when greed is the dominant emotion, investors are filling up their bags and hyped about the potential gains ahead. In other words, they’re bullish.
Like above, greed in a market is usually associated with a bull market and prices rising - regardless of the specific reason. Interestingly, greed is usually accompanied by a kind of fear - FOMO (fear of missing out). This emotion drives investors to buy, buy, buy.
Understanding how emotions may impact markets can help crypto investors predict behaviors and identify investment opportunities - particularly when the index indicates extreme fear or extreme greed.
Extreme greed often means prices are skyrocketing. Although it might seem like a great time to invest, the opposite is often true as it may be a great time to sell and take profits - it can often mean the market is due for a correction and prices will fall.
Meanwhile, extreme fear often means prices are plummeting as investors are selling at a loss. Although it may not seem like the best time to invest, it’s often a buying opportunity.
Many of the most successful investors fill their bags when the prices are at their lowest and sell when prices are at their highest. In Warren Buffet’s own words, “Be fearful when others are greedy, and be greedy only when others are fearful.”
Investors who understand how emotions may impact the crypto market use the Crypto Fear and Greed Index as one of many market indicators to help inform them of opportunities to buy and sell.
One of the big benefits of the Crypto Fear and Greed Index is it uses five different data sources to calculate market sentiment:
Surveys have also previously been used to help calculate market sentiment, but these are currently paused.
It's also important to note that these data sources are all based on Bitcoin currently, not other cryptocurrencies, but this is likely to change in the future as Ethereum and other major altcoins become more dominant.
It’s important to understand what each data source means and why it’s included in the Crypto Fear and Greed Index.
This data source looks at current market volatility and average values compared to the last 30 and 90 days, as well as the maximum drawdowns of Bitcoin. Generally speaking, high volatility signals fear.
This data source compares buy and sell volumes to the last 30 and 90 days. High daily buy volumes in a positive market generally signals greed.
For this specific Crypto Fear and Greed Index, this data source is based on Twitter currently (although Reddit is coming!) and looks at the social media interest in Bitcoin through hashtags and so on. A high interaction rate shows growing public interest and may signal greed.
This data source looks at how dominant Bitcoin is in the wider market based on the market cap share of the whole crypto market. Bitcoin dominance increasing may signal fear, as investors stick to the known and theoretically safer investment. Bitcoin dominance decreasing may signal greed as investors may be making riskier investments in lesser-known altcoins in the hopes of higher returns.
Finally, the last data source looks at Google Trends data for a variety of Bitcoin-related search queries and analyzes those queries to indicate fear or greed. For example, a high trend in "how to buy Bitcoin" may indicate prices are risking and greed is growing, while a high trend in "should I sell Bitcoin at a loss" may indicate prices are falling and fear is growing.
Although the Crypto Fear and Greed Index is an incredibly useful tool - it does not and cannot predict future prices. Instead, investors should use a Fear and Greed Index as one of many indicators to help inform their investment strategy.
Broadly speaking, using the Crypto Fear and Greed Index comes down to detecting fear, detecting greed, and acting accordingly based on your unique investment strategy. Both extreme fear and extreme greed may indicate market conditions that will make some investors inclined to buy or sell.
Here’s an example of when the Crypto Fear and Greed Index may have helped investors react to changing market conditions.
Here's the Crypto Fear and Greed Index from 2018 to 2023.
If we look at some of the highs, we can associate them with specific market conditions. Where you can see historic examples of extreme fear, these directly correlate with market price crashes in 2019 and 2022. Similarly, where we see historic examples of extreme greed, these correlate with all-time high prices and bull markets.
In fact, more recently we can see where the market began to cycle from a bear to a bull market throughout early 2022 and slowly recover, before becoming a little more chaotic as the contagion of FTX spread - before finally recovering back to a neutral sentiment as market conditions began to recover in the beginnings of 2023.
What does all this show? Greed is often followed by a crash and fear is often followed by a climb. When market conditions are at their bleakest, it often isn’t as brutal a bear market as it seems, or as the famous mantra goes, “the time to buy is when there's blood in the streets.”
Similarly, it may also help encourage investors to take some profits while the times are good, instead of holding on in fear of missing the next all-time high.
It depends on what you actually mean by that question. If you're asking, "can the Crypto Fear and Greed Index predict the future price of cryptocurrency?" then the answer is a resounding no.
If you're asking, "can I use the Crypto Fear and Greed Index as a reliable tracker of short-term market sentiment?" then the answer is yes.
The Crypto Fear and Greed Index is just one trading indicator of many. It can be helpful in helping you identify short-term trading opportunities. But you should be using a variety of tools to help you navigate the market and plan your investment strategy - including a crypto portfolio tracker like Koinly.
Another important thing to keep in mind is that although the Crypto Fear and Greed Tracker does tend to follow market cycles - it's not an exact science. It can't tell you when a price will peak or bottom. Extreme fear doesn't mean the price can't go lower and extreme greed doesn't mean the price can't go higher. You need to carefully consider and weigh up your short and long-term investment strategy against any trading indications from the Crypto Fear and Greed Index in order to make an informed decision.
Balancing fear and greed can help you make better investment decisions as you’re relying on data points instead of emotions. Here are some strategies to help you invest without all the emotion:
More questions? Here are some of the most common questions we hear about the Crypto Fear and Greed Index.
Extreme fear means the Crypto Fear and Greed Index is below 24. It generally means prices are falling across the market - whether that's due to macroeconomic factors or industry-specific developments.
Extreme fear means the Crypto Fear and Greed Index is above 75. It generally means prices are high across the market and that a price correction may soon occur.
The Crypto Fear and Greed Index is a useful tool for understanding short-term sentiment in a market, but less so for predicting or understanding bull and bear runs. The Crypto Fear and Greed Index simply signals market sentiment on a given day - and while this can be useful - it doesn't predict what will happen the next day, especially in a volatile market where industry changes can happen fast.
A market indicator is a tool that helps investors analyze market data. The Crypto Fear and Greed Index is an indicator of market sentiment. Successful investors use a variety of market indicators to inform their investment strategy including technical indicators and fundamental indicators.
An index takes many data points and combines them into a single value. For example, the Crypto Fear and Greed Index takes 5 data points and combines them into a single value between 1 and 100.
No. The Crypto Fear and Greed Index analyzes market sentiment. Market sentiment may closely correlate with specific market conditions and prices, but it cannot and does not predict the future prices of crypto.
Although the Crypto Fear and Greed Index is a useful tool - you’ll need more than one tool to help you have a strong investment strategy. Even if you use the Crypto Fear and Greed Index as an indicator of when opportunities to sell and take profits may arise, you’ll still need to carefully consider a few things:
A crypto portfolio tracker can help you with both of these, tracking both your unrealized and realized gains and losses, and your tax liability, to help you better understand how your portfolio is performing and better identify which assets to sell and when.
Koinly is both a crypto portfolio tracker and a crypto tax calculator. Best of all, we’re completely free to use until you want to download a crypto tax report. Sign up free today.
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