By Nathan Ferguson
As a cryptocurrency investor, you’ve likely come across the CFGI (Crypto Fear and Greed Index) either in the news or social media. Crypto Fear and Greed Index is a metric meant to measure the current state of the cryptocurrency market at any particular point in time.
It is critical to comprehend the index’s structure, what it captures, and what it informs you well about the market to determine whether or not it is an indicator that should be taken into consideration when making investing decisions.
What Is Meant By The Crypto Fear And Greed Index?
The index creates a single number between 1 to 100, with 1 suggesting that the cryptocurrency market is in a condition of extreme fear ( that traders are selling), and 100 showing that the market is experiencing an excessive amount of greed (meaning that traders are buying)
A basic principle is that when the value of the index is one, it indicates that there is a good opportunity to purchase anything. it is due to the fact that the number 1 signals “great fear” in the market, which means that people are reluctant to acquire at this period, and the value could be deflated as individuals sell or stay away because they are concerned that the cryptocurrency’s value will decrease.
“Buy when there’s blood on the streets,” as billionaire American financial guru Warren Buffett famously quipped.
On the flip side, if the index reaches 100, this would be interpreted as “extreme greed” and would be viewed as a signal to sell in most cases.
Consider this a stampede of people attempting to get through a hot market at whatever cost. They hope to benefit from a spectacular gain similar to that experienced by investors in meme coins in 2021. A high probability exists that prices will swiftly reverse and plummet quickly when they climb rapidly.
In other words, when the CFGI value is low, it may indicate that the cryptocurrency price will rise in the near future, and when the CFGI index value is high, it may indicate that the cryptocurrency price will fall in the near future.
What Role Do Fear And Greed Play In The Cryptocurrency Markets?
Moods and emotions have a significant influence on our thoughts and actions. They have a tremendous impact on our decisions in our lives. However, losing one’s ability to think clearly could be crucial in making blunders while selecting if to enter or depart the financial markets.
When prices surge, traders get overconfident. They enter the crypto market just as the market is about to correct. On the contrary, they get extremely concerned when values begin to fall. Many of them liquidate their positions just as the best possibilities to invest in them.
· Fear Of Missing Out (FOMO) Or Greed
When it comes to making decisions, fear is among the key emotions that influence. However, while there are many different sorts of fear regarding trading, one of the most prominent is the FOMO (fear of missing out) on a good chance.
When the markets are greening, fear of missing out (FOMO) emerges. It arises from the fear of missing out on a potential profit you may make by purchasing digital assets on the spur of the moment, no matter what the value is or what various technical indicators are showing.
On the other hand, Prices are accustomed to experiencing corrections following bull runs. As a result, greed increases the likelihood of overpaying and incurring losses.
When the market is poised for a correction, the CFGI will imply that investors are overconfident in their investments. The greater the level of greed, the greater the likelihood of forthcoming stock market sell-offs.
· Fear Of Losing
In contrast, another type of anxiety, called the Fear of Losing, reflects a general sense of unease and uncertainty throughout the market. When faced with losing money, people tend to behave in one of two ways: they avoid the situation or overreact.
First, it prevents traders from leaving their positions whenever the markets are in a downward trend. They fail to recognize that a loss has occurred and continue to do nothing, resulting in considerably higher losses and worse damage in the long run.
Meanwhile, when it comes to overreacting, the fear of losing money causes tremendous caution to be exercised. Because traders are concerned about future trend reversals, they delay the implementation of their trading techniques and liquidate their positions prematurely, even while the indices are still in the green.
Despite this, when the crypto Worry & Greed Index suggests fear, it is frequently accompanied by a decline in the value of digital assets. Alternatively, the persistent sell-offs signal that there are excellent buy-in possibilities. The greater the index (fear), the greater the likelihood of effectively entering the market.
What Is The Methodology Used To Calculate The Crypto Fear And Greed Index?
When calculating the crypto Fear and Greed Index, experts collect specific data from a variety of sources, all of which have a different % of the influence on the final result. The data comes from a variety of sources, including:
1. Volume
The recent trading volume of a particular crypto coin is compared to its historical trading volume data (mostly to the value of the 30/90 days Moving Average), which is used to determine its worth. If the existing purchase volume is more than the historical volume, this suggests that investors are feeling greedy or bullish.
2. Volatility
The current price swings of the coin are compared to the coin’s history price volatility, that is, mostly the values (average) of the 30 and 90 days Moving Averages (MA). If recent market fluctuations are greater than previous price fluctuations, this suggests that the market is fearful about the future.
3. Surveys
Alternative.me, the publisher of the CFGI (Crypto Fear & Greed Index), conducts cryptocurrency-related polls among members of various cryptocurrency communities.
Despite being momentarily halted, the polls continue to collect between 2 and 3 thousand votes per survey, which are also included in the market sentiment index’s calculation.
4. Social Media
Mentions on social media sites such as Twitter or Reddit can likewise be used as a source. The greater the number of bullish and positive posts, comments, and hashtags linked to a specific cryptocurrency that surfaces on social media, the greater the likelihood of greed and vice versa.
5. Searches
Monthly Google Trends search traffic for a particular digital asset can also be used to measure the market’s interest in the product in question. The keywords associated with the item, on the other hand, are the most important in this scenario. The more optimistic searches imply an increase in greed, whereas the more pessimistic investigations reveal an increase in anxiety.
6. Dominance
Between Bitcoin and other cryptocurrencies, the amount of the entire market value serves as leverage. When the fear index in the altcoin markets rises, the dominance of bitcoin increases, and the price of bitcoin falls as a result.
On the contrary, as Bitcoin’s popularity wanes, the market shifts its attention to other virtual currencies that are more profitable.
Is The Fear And Greed Index A Dependable Indicator?
The issue then becomes: Does the CGFI provide an overview of the potential price of cryptocurrencies such as bitcoin? The Crypto Fear and Greed Index, as measured by LookIntoBitcoin.com, has been plotted against the bitcoin price since 2018.
The price of the stock and the value of the index appears to be highly connected – albeit over a very short time. A rise in bitcoin price seems to have increased the Fear and Greed index value.
Several factors should be taken into consideration when using the CGFI as an investment indicator. Ask yourself some crucial questions, such as the following:
- Have I given any consideration to my tax approach in relation to cryptocurrency? If you’re actively trading cryptocurrency, whether swing trading or day trading, related to technical indicators like the Fear and Greed Index, you’re more likely to be subject to brief capital gains tax (just like income tax) on your profits. You must consider this while making trading selections.
- Is it better to be a long-term investor or trader? If you are a trader who is frequently moving in and out of cryptocurrency positions, tracking the index value may provide you with useful information. As a long-term investor, aggressively trading may result in you missing out on significant gains and, as a result, reducing your total return.
- Is it better to be a fundamental or a technical trader? The CFGI is a technical indicator that measures fear and greed. Its final result does not take into account any of the key characteristics of cryptocurrencies. Consider this: If you’re making an investment decision in bitcoin-based on a macroeconomic forecast, it’s simple to claim that the crypto Fear and Greed Index is completely unrelated to your investing strategy.
What Is The Appearance Of The Crypto Fear & Greed Index?
The month of June 2019 is among the finest examples of overly optimistic markets. The world’s most valuable cryptocurrency was then on a four-month climb; it will be the first since the protracted “crypto winter” that it had experienced.
According to CoinMarketCap, the price of bitcoin has climbed thrice since February and has reached $13.000 as of June 27.
The Crypto Fear and Greed Index, on the other hand, rose to an exceptionally high greed zone over a period of time and remained there for a few weeks. As demonstrated in the chart provided by Alternative.me, it even achieved record highs of 95 on June 26, breaking previous records.
As both charts demonstrate, the market downturn will not be delayed for much longer. Extreme avarice had reached its limit and was beginning to wane. Because of the cautious BTC investors and traders who took profits, the price dropped further, and the downturn continued, which prompted the bears to re-enter the market.
And here’s yet another illustration of the extremes that can be found in the CFGI. This time, it’s a fear of the unknown. According to the graph, the index reached its lowest level of 5 on Aug 22, showing the greatest level of anxiety ever recorded.
In the interim, Bitcoin’s price fluctuated between $10.000 and $10.000 at various points, but it was also on a larger downward trend. Despite the extraordinarily high concern level and reduced BTC price, bulls have not re-entered the market to purchase the asset. It is worth noting that the price of bitcoin has not changed considerably and has continued to fall till January 2020.
What Makes The Crypto Fear And Greed Index Such A Great Tool?
The cryptocurrency industry has plenty of success and failure tales, just as there are in any other market. Trading profitably necessitates a high level of knowledge and expertise. Even the strongest fundamentals and technical methods, on the other hand, might be thrown off course when the trader’s emotions come into play.
In order to trade profitably, it may be necessary to keep one’s emotions in check just out of the way. The problem is that, even for experienced traders, this is not an easy task.
However, objective data on market attitudes may be of use. Tools such as the CFGI give traders hints as to what sentiments are driving the unpredictable digital asset markets, which can help them make better trading decisions. Knowing when a bull run or correction is coming may enable you to take benefit of the market’s emotions and turn yourself into a profitable trader.
How Do You Trade With Fear And Greed?
As a daily indication rather than an instrument for long-term trading, the CFGI is more commonly employed.
Using the Fear and Greed index as a pattern indicator can assist you in making informed decisions about your cryptocurrency investments. Example: When the CFGI value is low, it indicates that the crypto price will grow, and you may decide whether to buy, hold, or sell cryptocurrencies. Generally speaking, rising prices suggest that now is the best time to sell.
A high index value may signal that the crypto price will decline soon, making it a good time to invest in cryptocurrency. As a result, bitcoin attitudes determine when a price rise or a local bottom will occur in the market.
As the index moves into the domain of acute worry, it tends to reverse direction. That’s the point at which anxiety converts into the first signs of greed, which then explodes into full-fledged greed as the situation demands.
The CFGI is a tool for tracking changes in market sentiment in the cryptocurrency market. For instance, huge swings in the market may allow you to enter or exit the market before the entire market does so.
The tool does not perform well in terms of long-term examination of cryptocurrency markets. An extended bull or bear market, on the other hand, is characterized by recurrent cycles of anxiety and greed.
On the other hand, Swing traders will profit from this movement of the market. The speculative technique in which investors acquire and hold assets to profit from anticipated market moves is known as swing trading.
To Be A Great Trader, How To Manage Greed And Fear?
The use of smaller trade sizes, the development of a trading strategy, the keeping of a trading log, and the acquisition of knowledge from others will protect you from the impact of intense fear or excessive greed.
On notable (or large) deals, price changes are less obvious, increasing the stress associated with large transactions. As a result, it is critical to reducing your deal’s volume to keep your sentiments and trading judgments in check.
Being a professional trader is paved with a well-defined trading strategy. Without a strategy, one runs the danger of losing money due to over-leveraging their cryptocurrency holdings.
Making a record of your trading activity to understand better what is effective for you and what is not helps you make more reasonable decisions. By keeping a trade record, you may learn from your mistakes, and as they say, practice makes perfect!
In order to filter out the unnecessary and polish the fruitful, it is necessary to assess the trading actions that have been recorded in a notebook. If you would like to become a successful trader, you must put your mind at ease while you are doing it.
Successful investors such as Warren Buffett can teach you a thing or two about investing. However, you should avoid using the herding approach because it will have an impact on your emotions, and you may lose your money.
You can also study published information from reputable sources such as PayPal or Coinbase to better understand the cryptocurrency industry. Using the example of Coinbase, which periodically sends out price alerts concerning price drops or price increases, you can use this information to help make investing decisions.
Summing Up
In general, the CGFI provides useful information into the current situation of the cryptocurrency markets, particularly in the short term. Each individual will need to conduct their study to evaluate whether the index benefits their investment objectives and philosophy.