Traders use a variety of different indicators to analyze cryptocurrency charts and determine future asset performance. Technical analysis indicators can be based on volatility, momentum, volume, and in most cases, trends. A trend indicator popular among crypto investors is the Fear and Greed Index. But in this special case, we have a trend indicator that is also an index: meaning that it combines a diverse range of data to predict prices.
The Crypto Fear and Greed Index works by estimating the market’s sentiment, which is represented by a score ranging from 0 to 100. The lower end (0-49) of this spectrum represents fear, while the higher end (50-100) represents greed.
Utilizing standard market psychology, we determine that greed is a moment during which an asset is overbought. When fear is present, it is oversold. In the first case, we have a scenario where the asset is likely to be rejected and decrease in price while the opposite is true for fear.
Therefore, we can conclude that the Fear and Greed Index can be integrated into one’s trading strategy to determine when to enter and when to exit the market.
When evaluating the present or future value of a cryptocurrency, traders commonly rely on hard technical data. The types and sources of data that one can choose from are nearly endless. As a result, market participants can avoid spending hours of their time collecting data by using indexes.
What is an index? An index represents a diverse range of data that are combined and represented in the form of a single unit of measurement. For example, famous stock market indexes such as the DOW and SPX track the performance of America’s industrial and publicly traded companies.
In the context of this article, the index in question is not a purchasable stock that can be bought for speculative purposes, but an indicator. Specifically, the Greed and Fear Index is a weighted measure of crypto market data.
The Crypto Fear and Greed Index is a sentiment indicator based on CNNMoney’s model for the TradFi market that focuses on cryptocurrencies. The index was created and hosted by Alternative.me.
Whenever the indicator reaches an extreme (0 or 100), market participants can expect the crypto market to reverse its direction. More specifically, these extremes indicate that the market is too fearful or greedy, which leads to the opposite effect.
If the index reaches a rate of 50, the market’s state is considered to be neutral.
Since altcoins are correlated to Bitcoin’s price action, the Fear and Greed Index bases its score exclusively on Bitcoin-related market data. The following types of data are utilized:
Volatility accounts for 25% of the index, and it represents the pace at which Bitcoin changes in value. For volatility, the indicator uses market data from the last 30 and 90 days.
Market volume accounts for another 25% of the index and represents both the average trading volume and market momentum for the past 30 and 90 days. Periods during which the market experiences waves of high trading volume are considered to increase greed.
Social media accounts for only 15% of the index. This data set sources relevant crypto hashtags and engagement rates from Twitter. If Twitter is quieter than usual and produces low engagement rates, the market enters a fearful state.
Bitcoin dominance makes up for 10% of the index, and as the name implies, it represents Bitcoin dominance compared to the remaining section of the crypto market. An increase in dominance typically indicates that capital and profits from altcoins are pushed back to Bitcoin.
Google Trends represent 10% of the index data. The index sources search queries related to Bitcoin and relevant crypto keywords from Google Trends to estimate market sentiment. Google Trends results affect fear and greed similarly to social media engagement.
No indicator is capable of predicting the future on its own. For traders to stay successful and profitable during their journey, it is recommended to pair numerous indicators in combination with knowledge gained in the domain of technical analysis. Not to mention, every individual trader has to be their own judge and reach a rational conclusion on their own, since two traders can read the same data and reach different interpretations.
Due to its volatility, the Crypto Greed and Fear Index is generally implemented for assessing short-term and medium-term price predictions. Utilizing it for long-term price prediction is not suggested considering that the indicator is prone to rapid changes and is easily affected by new factors.
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