Crypto Fear & Greed Index: How it works and used in Crypto?

As we all know that the crypto market is like a roller coaster ride where price volatility is a major concern. When the market is rising, investors tend to get emotional and start bulk buying with the fear of missing out (FOMO).

One day everyone seems to be getting greedy and buying crypto assets and the next day, because of any of the various factors affecting price, there is panic-selling. Due to this, the price jumps up and down which makes it difficult to make a right trading decision.

Contents

To determine such market sentiments, Crypto Fear and Greed Index (F&G Index) is used as a tool designed to transform market sentiments into a simple scale, ranging from 0-100. This article will cover Crypto Fear and Greed Index in detail, its history, scores and sentiments, and how it is calculated . We will also learn about its usage in crypto trading and where yo can find it.

What is Crypto Fear and Greed Index?

Crypto Fear and Greed Index is an advanced trading tool that is developed to measure the emotions and sentiments that drive market behaviour, between 0 (extreme fear) and 100 (extreme greed). It’s called an index because it takes multiple data sources and combines them into a single figure. It includes data analysis of volatility, trading volumes, surveys, social media activities, and other metrics.

In the crypto market, this index shows how these emotions (fear and greed) influence buying and selling decisions which impact asset price. It quantifies the sentiments whether the market is undervalued due to fear or overvalued because of greed.

Fear and Greed index was originally developed for the traditional financial market which was later adopted by the crypto industry to analyze the dynamics of this unpredictable market.

History of Fear and Greed Index

The concept of the Fear and Greed Index was developed by CNN Money in 2012 for the stock market. It was initially developed for calculating the emotions of traders which help them make decisions related to buying and selling stocks.

Before the introduction of this tool, it was understood how investors’ emotions influence market behaviour but a standardized tool to measure that was lacking. This index filled this gap by providing a quantifiable metric to assess them.

It was found that the crypto market is highly volatile where the emotions of traders play an important role. Hence, after modifying Fear and Greed Index for the crypto market, it was first adopted by Alternative.me in 2018 to deal with the complex market dynamics.

How Fear and Greed Index is Calculated?

It is a frequent question that troubles crypto enthusiasts. It is calculated with the help of six components: volatility, market momentum, social media sentiment, dominance in the market, surveys, and Google trends. Let’s explore each by taking an example of Bitcoin.

Volatility (25%)

It analyses Bitcoin’s current volatility and maximum drawdowns compared to the last 30-day and 90-day average. It contributes 25% to the F&G index where high volatility is associated with fearful conditions and low volatility is associated with greedy conditions.

Market Momentum (25%)

It is a component that assesses Bitcoin’s current trading volume and market momentum relative to the recent averages. If there is high buying volume, it indicates a greedy market and a low buying volume indicates a fearful market.

Under this segment, we analyze the frequency and engagement levels of Bitcoin-related hashtags and discussions on social media platforms like X, Reddit, LinkedIn and others. If there is a high level of engagement with increased hashtags then it indicates a greedy market while rare discussion and hashtags indicate a fearful market.

Surveys (15%)

This is a component where data is collected from public polls to calculate market sentiment. Currently, this component is not used. However, previously it has played an important role in calculating the Fear and Greed Index.

Dominance (10%)

This section examines Bitcoin’s market dominance with relevance to other cryptocurrencies. If there is a rise in Bitcoin’s share then it indicates a fearful market because investors are shifting towards a safe currency like Bitcoin while the decline in Bitcoin’s share indicates a greedy market situation.

Google Trends (10%)

There is an analysis of Google search trends for queries related to Bitcoin. The increase or decrease in search terms related to Bitcoin indicates fear or greed in the market respectively.

Fear and Greed Index: Scores and Sentiments

The scores and sentiments of the Fear and Greed Index are classified into four levels, ranging from 0 to 100 in a quarterly manner.

Scores	Sentiments	Indicates
0 – 24	Extreme Fear	This score indicates the time when the trader is highly pessimistic and fearful about the market, which leads to panic selling and price drop. For example, if Bitcoin crashes suddenly, people sell out of fear and Bitcoin price falls.
25 – 49	Fear	This score also indicates that investors are cautious (fearful) but not panicked. In this situation, asset prices may decline slowly but not as seen in the ‘extreme fear’ condition.
50	Neutral	It is a balanced condition where the market is not greedy and fearful.
51 – 74	Greed	This score indicates that traders are excited about the market and are buying which pushes prices higher.
75 – 100	Extreme Greed	This score indicates a situation where investors are highly optimistic and over confident which drives asset purchases and takes prices to new highs.

How to Use Fear and Greed Index in Crypto Trading

Fear and Greed Index is quite a simple tool to use that understands market sentiment. This tool by indicating levels of fear or greed helps investors identify whether to buy an asset or to sell it.

As we have discussed above, this index has four sentiment levels divided quarterly where different scores indicate different levels of sentiment. It gives a score between 0 and 100 wherein a score from 0 to 24 indicates extreme fear while a score from 75 to 100 indicates extreme greed.

This index is used by each investor in different ways – some investors in extreme fear conditions avoid buying assets while some investors see it as an opportunity to buy crypto at low prices.

Where to Find Crypto Fear and Greed Index?

We can find the Crypto Fear and Greed Index on several market data aggregator platforms such as Coinmarketcap (CMC), Coinglass, and Coinstats. This platform measures and provides real-time updates on the current level of fear and greed prevailing in the market by analyzing various components.

Coinmarketcap- Fear And Greed Index Chart

Conclusion

With the growing crypto industry, different tools and methods are coming up. The Crypto Fear and Greed index is one such effective tool that assists in measuring market sentiments and divides them by giving scores. Depending solely on this index might be risky but if we consider it along with market trends, volume analysis, and new events then we can make well-informed and fruitful decisions.

However, it is not always an accurate tool for a balanced strategy. There is a need to combine the index with technical and fundamental analysis.