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Fear and greed index expands to crypto
The Fear and Greed Index is a tool that investors in traditional sharemarkets have used for decades to measure the current sentiment of the market. It has only recently been applied to crypto markets, which seem more sentiment-driven than any.
The index looks at cryptocurrency markets and assesses whether they are becoming overly fearful or overly greedy. Hence why it is called the Fear and Greed Index.
- When overly fearful, it generally means Bitcoin is cheap/undervalued at that time and could present a good buying opportunity.
- When overly greedy, it may indicate the price of Bitcoin is too high above its intrinsic value and hence sell.
How does it work?
The Fear and Greed Index is a simple chart that scales from 0 to 100 and is colour-coded accordingly where 0 is red and 100 is green.
- Red and zero signal extreme fear and could indicate that many Bitcoin ($BTC) investors are too concerned about the price dropping further.
- Green and 100 signal extreme greed and could indicate that many investors of Bitcoin ($BTC) are too excited about the price of Bitcoin rising a lot further in the future.
The value of 100 has the opposite meaning: investors are getting extremely greedy. There may be some FOMO buying.
When overlaid on top of the Bitcoin price chart, it allows an investor to see not only the current score but also to see how the score has changed with price over time. It adds a new dimension to the index, by showing how Bitcoin interacts with fear and greed over time. Behaviours such as “FOMO buying” or “panic selling” are more easily visible than other investment markets.
At the moment only Bitcoin is included in the index but it is a great tool to measure investors’ fear and greed in the crypto market. But the index is only a tool that tracks sentiment in the market. When using it as an indicator for buying and selling, you should do so using other factors as well.
