Fear and greed are frequently used to categorise market sentiment. This holds true for both the stock and cryptocurrency markets. However, in the cryptocurrency markets, it is frequently even more of a "tell." This is where the cryptocurrency fear and greed index comes in. Particularly for risk-averse investors.
The crypto fear and greed index is a metric used to determine which market sentiment is dominant. The beauty of this index is its simplicity. It assigns a score from 0 to 100 to sentiment. When the number is zero, it indicates that extreme fear is in charge. And a score of 100 indicates that greed has gotten out of hand.
How The Crypto Fear And Greed Index Works
Our in-house Crypto Fear and Greed Index is based on three different factors – each factor is gauged from 0 to 100 and equally weighted to generate the index value.
The three factors are:
Stable coin flows
If there is a market sell-off and investors are expecting the value of their crypto investment to decline, they may rotate into stable coins as a safe haven. As such, we look at the general trend of stable coins volume and activity to measure if the market is greedy or fearful.
The performance of the top 18 coins relative to its 120-day average. A greater relative performance indicates greed and vice versa.
Top 18 Coins Price Strength
The number of coins of the top 18 coins hitting 90-days highs relative to those hitting 90-days lows. A greater number of coins hitting 90-days highs versus 90-days lows indicates greed and vice versa.
You can purchase and attach our Crypto Fear & Greed index into your TradingView chart by using this link. This paid version combines together with the relative strength index (RSI) into an indicator panel to show you the asset momentum and overall market sentiment.
Figure 1 : Fear & Greed index + relative strength index (RSI) indicator
Alternatively, you can attach our free version Fear & Greed index indicator into your TradingView chart, at which only the Crypto Fear & Greed index would be plotted on the indicator panel.
Figure 2 : Fear & Greed index indicator
How to Use the Index as a Tool for Investing
The crypto fear and greed index can be divided into four quadrants.
- A score of 0-24 indicates that the markets are gripped by extreme fear. This most likely indicates that prices are low. This could indicate a buying opportunity before a price reversal occurs.
- A score of 25-49 on the index indicates that the market is fearful. This simply means that fear outnumbers greed. As a result, prices and interest in cryptocurrency are low but not terrible.
- A score of 50 to 74 indicates that there is greed in the crypto markets. This indicates that there is a lot of buying going on and that prices are rising. In general, it is regarded as a positive sign.
- When the index falls between 75 and 100, it indicates that the market is likely overheating. And this could be an indication that a correction is on the way.
Figure 3 : Four quadrants of Fear & Greed zone
This index can be a very useful tool for active traders for the reasons stated above. It has evolved into a particularly reliable technical indicator for the cryptocurrency markets. It's also useful for long-term investors. When extreme fear is the dominant emotion, it can indicate that it is a good time to buy for the long term. And when extreme greed is the dominant emotion, it may be time to sell at a profit.
Let test data when used with Bitcoin
Figure 4 : Bitcoin vs Crypto Fear & Greed index
When we combine the Crypto Fear and Greed Index with the price of Bitcoin, we discover that when the Crypto Fear and Greed Index below the extreme fear level (red circle on Figure 4), the price of Bitcoin stops from dropping sharply and slowly reverses from its lowest price.
In the other case, if the Crypto Fear and Greed Index is above the extreme greed level (green circle on Figure 4), Bitcoin's price starts to fall from its peak.
Based on the results of the tests, it appears that we can use the Crypto Fear and Greed Index into our crypto investing research.
In conclusion, the Crypto Fear and Greed Index can be used to gauge investor fear and greed in the crypto market. However, this is only for tracking investors' market attitudes; using it to indicate buying and selling signals requires a combination of other indicators, for example, we prefer to use our in-house Multi Timeframe EMA combined with Crypto Fear & Greed index in our trading system.
You may check out the facts and make your next purchase with more confidence now that you know what the Fear and Greed Index is.