What is the Crypto Fear and Greed Index?
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. 😱🤑
What is the Crypto Fear and Greed Index?
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:
How does the Crypto Fear & Greed Index work?
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
What do fear and greed mean in crypto?
Understanding why and how to use the Crypto Fear and Greed Index starts with understanding what fear and greed can mean in the market.
Fear & crypto
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.
Greed & crypto
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.
Why use the Crypto Fear and Greed Index?
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.
How is the Crypto Fear and Greed Index calculated?
One of the big benefits of the Crypto Fear and Greed Index is it uses five different data sources to calculate market sentiment:
- Volatility (25%)
- Market momentum/volume (25%)
- Social media (15%)
- Dominance (10%)
- Trends (10%)
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.
Crypto Fear and Greed Data Sources
It’s important to understand what each data source means and why it’s included in the Crypto Fear and Greed Index.
1. Volatility
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.
2. Market momentum/volume
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.
3. Social media
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.
4. Dominance
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.
5. Trends
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.
How to use the Crypto Fear and Greed Index?
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.
Crypto Fear and Greed Index Example
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.
Is the Crypto Fear and Greed Index reliable?
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.
How to avoid investing based on emotion
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:
- Never invest more than you have: An age-old mantra, but FOMO won't feel as bad as losing more than you can afford to.
- Use dollar cost averaging: This popular investment strategy involves making regular small investments, rather than trying to time one perfect investment.
- Diversify your portfolio: Having a diverse portfolio with many crypto assets can help you reduce asset-specific risk.
- Use different strategies in bear and bull markets: Each market calls for a specific strategy. Your strategy should be able to weather the good and the bad. You can learn more in our bull market and bear market guides.
- Remember markets are cyclical: Although things seem bad (or good) right now, markets - including the crypto market are cyclical. What goes up must come down, and what comes down will go up. Invest for the long-term and hodl (plus you’ll pay a lower long-term Capital Gains Tax rate anyway!)
FAQs
More questions? Here are some of the most common questions we hear about the Crypto Fear and Greed Index.
What does extreme fear mean in crypto?
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.
What does extreme greed mean in crypto?
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.
Is the Crypto Fear and Greed Index a short or long-term indicator?
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.
What is a market indicator?
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.
What's an index?
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.
Does the Crypto Fear and Greed Index predict the future price of cryptocurrency?
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.
DYOR and use a portfolio tracker
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:
- Your gains and losses: Do you know what your specific gain or loss would be if you sold? Even if the market is up and you think it's time to sell - knowing how this would benefit your specific portfolio and capital gains is key.
- Whether you’re selling a short-term or long-term asset: Your tax bill can make a big difference in whether it's time to sell or not. If you’re selling (or swapping) crypto you’ve held for less than a year, you’ll pay the short-term Capital Gains Tax rate of up to 37% in the US. But if you hold for a year, you’ll pay the much lower 10% - 20% rate instead. This can make a huge difference in the gains you actually make overall.
- Sometimes selling at a loss is good: No really, it’s known as tax loss harvesting and it can help you save a bundle in taxes - both now and in the future.
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.
The information on this website is for general information only. It should not be taken as constituting professional advice from Koinly. Koinly is not a financial adviser or registered tax agent. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances. Koinly is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.