“The popularity of crypto is such that every new investor wants to taste it and it is this popularity that the crypto fans are looking for ways to make better investment decisions and ride the market in a profitable manner. A new Talisman has risen for the Crypto Fans and it is the ‘Fear and Greed Index’”.
The Two Drivers of Market: Fear & Greed
The crypto market like any other market is highly driven by the sentiments of the investors. Every investor feels two sets of emotions while investing and they are ‘Fear’ and ‘Greed’. The crypto market behavior is very emotional and this is the reason for its volatility. If the price starts to rise, Fear of Missing Out (FOMO) sets in and an investor feels extreme greed and when the market takes a plunge, fear of loss sets in which fuels the further downtrend in the market. Thus, to make sense of the direction of the market trend, there are various tools that are being used by the investors and ‘Fear and Greed Index’ is one tool that is gaining popularity among the investors.
The Fear and Greed Index
The fear and greed index is an index that defines the current market sentiment in terms of Greed and Fear. It is measured on a scale of 0-100, with 0 depicting ‘Extreme Fear’ and 100 depicting ‘Extreme Greed’. A score of 50 on the other hand depicts neutral sentiment. The creators of Fear and Greed index lays down a simple strategy for interpreting the index as follows:
- If there is an extreme fear in the market, it means that the investors must explore the buying opportunities. Closer to 0, the better.
- If there is extreme greed in the market, it means that the investors must start taking profits as correction is due.
- If there is a neutral sentiment, market trends go either ways and the investors must hold until the picture is cleared.
The base of Fear and Greed Index
The Fear and Greed Index is based on multiple factors that are measured on the daily basis and these include:
The volatility factor is considered while measuring greed and fear. The current volatility of the token is measured and is compared against the average of 30 days and 90 days. The more the volatility, the more will be the fear.
Momentum of the Market
The current volume and the momentum of the market is measured and analyzed and compared with the 30 day and 90 day moving averages to identify the momentum of the coin and high volume and positive momentum depicts greed and vice versa.
This depicts the market cap share of the coin. If the market share of the coins like Bitcoin expands, it means that there is a fear in the market and the investors are dumping the more risky altcoins for Bitcoin.
Various trends regarding the cryptocurrencies are being formulated by Google against the search queries and other metrics and these metrics are considered while calculating greed and fear.
Social Media such as twitter handles, Facebook, Instagram pages are monitored to identify the hype regarding a cryptocurrency and these metrics are used to identify fear and greed. High amount of interactions on social media depicts greed.
All the above factors are measured and a cumulative score is derived which gives the Fear and Greed Index value that can be easily interpreted by all the investors.
Disclaimer: The article should not be considered as any financial advice. It is advisable to conduct thorough research before investing.
Photo by- sergeitokmakov on Pixabay