Should You Use the Crypto Fear and Greed Index to Time the Market?

At the risk of oversimplifying things, a common saying about the stock market is that it is largely driven by only two emotions: fear and greed.

When people let emotions get the better of them, fear and greed can run wild in the market, leading to overblown reactions that warp prices.

When people are fearful in the markets, sell-offs can be dragged out and keep prices much lower than where they should be.

On the flip side, when people are greedy in the markets, a bubble may form which may inflate the value of investments way beyond their fundamentals.

This is especially relevant to the Cryptocurrency market in general is still quite speculative and volatile.

As such, I think it’s important for Cryptocurrency investors to keep track of the Crypto Fear and Greed Index: a metric that measures the ongoing market sentiment for Bitcoin to make smarter Cryptocurrency investment decisions.

Here is all you need to know!

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Seedly does not recommend that any cryptocurrency should be bought, sold, or held by you.​ Readers should always do their own due diligence and consider their financial goals before investing in any investment product and consult your financial advisor before making any investment decisions.

TL;DR: Crypto Fear and Greed Index Guide

• The Crypto Fear and Greed Index is a metric that measures the ongoing market sentiment for Bitcoin and Cryptocurrencies and by extension other large Cryptocurrencies.
• Data is crunched to produce a reading on the index’s meter that ranges from 0 to 100:
  • 0-24 = Extreme Fear (Orange).
  • 25-49 = Fear (Amber/Yellow).
  • 50-74 = Greed (Light Green)
  • 75-100 = Extreme Greed (Green)
• There is still a good correlation between the price of Bitcoin and other large Altcoins.
• The index can thus serve as a good warning indicator to pay more attention to find opportunities to either ‘buy the dip’ or ‘take some profit.’

What Is the Crypto Fear and Greed Index?

As stated above the Crypto Fear and Greed Index is a metric that measures the ongoing Cryptocurrency market sentiment for Bitcoin and visualises this sentiment.

Do note that the index is currently reserved for Bitcoin. But, Alternative, the folks behind the index promise that they will add support for the larger Altcoins in the near future.

Also, the index is updated every 24 hours and gathers data from the five following sources:

Volatility (25 %)

We’re measuring the current volatility and max. drawdowns of bitcoin and compare it with the corresponding average values of the last 30 days and 90 days. We argue that an unusual rise in volatility is a sign of a fearful market.

Market Momentum/Volume (25%)

Also, we’re measuring the current volume and market momentum (again in comparison with the last 30/90 day average values) and put those two values together. Generally, when we see high buying volumes in a positive market on a daily basis, we conclude that the market acts overly greedy / too bullish.

Social Media (15%)

While our reddit sentiment analysis is still not in the live index (we’re still experimenting some market-related key words in the text processing algorithm), our twitter analysis is running. There, we gather and count posts on various hashtags for each coin (publicly, we show only those for Bitcoin) and check how fast and how many interactions they receive in certain time frames). A unusual high interaction rate results in a grown public interest in the coin and in our eyes, corresponds to a greedy market behaviour.

Surveys (15%) Currently Paused

Together with strawpoll.com (disclaimer: we own this site, too), quite a large public polling platform, we’re conducting weekly crypto polls and ask people how they see the market. Usually, we’re seeing 2,000 – 3,000 votes on each poll, so we do get a picture of the sentiment of a group of crypto investors. We don’t give those results too much attention, but it was quite useful in the beginning of our studies. You can see some recent results here.

Dominance (10%)

The dominance of a coin resembles the market cap share of the whole crypto market. Especially for Bitcoin, we think that a rise in Bitcoin dominance is caused by a fear of (and thus a reduction of) too speculative alt-coin investments, since Bitcoin is becoming more and more the safe haven of crypto. On the other side, when Bitcoin dominance shrinks, people are getting more greedy by investing in more risky alt-coins, dreaming of their chance in next big bull run. Anyhow, analyzing the dominance for a coin other than Bitcoin, you could argue the other way round, since more interest in an alt-coin may conclude a bullish/greedy behaviour for that specific coin.

Trends (10%)

We pull Google Trends data for various Bitcoin related search queries and crunch those numbers, especially the change of search volumes as well as recommended other currently popular searches. For example, if you check Google Trends for “Bitcoin”, you can’t get much information from the search volume. But currently, you can see that there is currently a +1,550% rise of the query “bitcoin price manipulation“ in the box of related search queries. This is clearly a sign of fear in the market, and we use that for our index.

This data is then crunched to produce a reading on a simple meter that ranges from 0 to 100 as follows:

• 0-24 = Extreme Fear (Orange).
• 25-49 = Fear (Amber/Yellow).
• 50-74 = Greed (Light Green).
• 75-100 = Extreme Greed (Green).

Here is the current Fear and Greed Index reading:

Bitcoin Correlation With Altcoins

In the past month or so, the Cryptocurrency market seems to be going through a bit of a bear market phase.

During this time, Bitcoin (BTC) has demonstrated a strong correlation with Ether (ETH) and the top Altcoins.

For the uninitiated, here is a quick primer on correlation values to help you understand the data below better:

• Any value between 0 and 0.3 represents almost no correlation between two assets.
• Any value between 0.3 and 0.5 represents a low correlation.
• Any value between 0.5 and 0.7 represents a moderate correlation.
• Any value above 0.8 suggests a high correlation.

More specifically, the BTC/ETH’s correlation has been 0.91 for the past 30 days.

In other words, the price of Bitcoin generally moves together with Ethereum and the broader Altcoin market.

However, over the past year, the correlation between Bitcoin, Ethereum and the broader Altcoin market is not as strong.

But, an important thing to note is that for the larger Altcoins, correlation is a hot and cold situation.

Although Bitcoin has been the trendsetter for price momentum in the Cryptocurrency market for years, this correlation is weakening as there has been more adoption of other Cryptocurrencies by developers and investors.

How the Crypto Fear and Greed Index Can Be Useful

With such volatility in the Cryptocurrency market, the people who trade or invest in Cryptocurrencies can get quite emotional.

When these traders or investors see the price of Cryptocurrencies climbing rapidly, they might get greedy and jump in due to a fear of missing out (FOMO). This will see large inflows of capital that will drive prices up.

On the flip side, these traders or investors might be driven by fear when they see the price of Cryptocurrencies plunge as well.

As such, this index is a gauge to measure both extremes:

• Extreme fear would indicate that investors and traders may be fearful. This could represent a buying opportunity.
• Extreme greed would mean that investors and traders are getting too greedy. This means that the market might be due for a correction as people are buying and holding at overbought price levels. As such, this might be a good time to sell and lock in some profits.

Sidenote: This goes without saying but you should do your due diligence and extensive research before you buy any Cryptocurrencies.

Can You Use the Crypto Fear and Greed Index to Time the Market?

So you might be thinking, can I time the market using the Crypto Fear and Greed Index?

Well, that is a NO from me as no one can time the market accurately and consistently,

Trying to time the market over the long-term will likely do you more harm than good.

Instead, this index should be used alongside investing strategies like dollar-cost averaging (DCA) or a specific trading strategy.

FYI: Dollar-cost averaging is an investment technique of investing a fixed amount of money into a particular investment on a regular schedule. 

When the index points towards extreme fear, this could be an indicator to buy up more units of Cryptocurrency.

Well, the opposite applies when the index points towards extreme greed. This is when you should consider buying fewer units of Cryptocurrency or take some profit.

In other words, the index can serve as a good warning indicator to pay more attention to find opportunities to either ‘buy the dip’ or ‘take some profit.’