Trading crypto is an emotional game. You can do all of the analysis in the world and be right about all of your market intuitions. But it can still be incredibly challenging to stick to your investment thesis in the face of the extreme volatility that the market is known for — especially when unexpected cryptocurrency news drops.
But what if you had a way of tracking all of this? It would do wonders for trades, right?
That’s exactly what the Bitcoin fear and greed index is for. It’s a metric that tracks when Bitcoin investors are greedy and when they’re feeling fearful.
Tracking the greed index an excellent way to gauge market sentiment in a more objective way. Keep reading to learn how you can use it to score bigger profits in the cryptocurrency market.
The basic concept of the fear and greed index is actually pretty simple. It’s an index that ranges in value from 0 to 100. When the scale is at 0, Bitcoin investors are displaying maximum fear levels.
At the other end of the spectrum, a score of 100 represents maximum greed in the markets. You can use these swings in sentiment to help you make decisions about your trades.
However, such a tool is only really worth using if it’s calculated in an objective way. And that can be tough to do — especially when you consider that we’re talking about translating human emotion into trackable data.
But the fear and greed index does as good of a job at this as you could hope for. Here’s how’s it calculated.
There are six metrics that make up this index. Here’s what those are and the percentage of the total metric that they account for:
Now let’s take a closer look at each of them.
When volatility scores are higher than average, it can be a sign of fear in the market. So the index measures the daily volatility of Bitcoin and then compares measurement to average volatility levels over the past 30 and 90 days.
The greed index measures market momentum by looking at daily volume levels and comparing them to average volume levels over the past 30 and 90 days. If there’s a lot of purchasing volume while the market is trending sharply upward, that can be a sign that investors are becoming overly greedy.
The index also takes the pulse of Twitter to track shifting trends in how people on social media are talking about Bitcoin. It does this by analyzing post counts for various hashtags.
This is, perhaps, the most direct way that the Bitcoin fear and greed index tracks market sentiment. It uses Strawpoll to conduct weekly crypto polls that simply ask people how they’re currently feeling about Bitcoin.
Bitcoin dominance is another really important part of the fear and greed index. But perhaps not in the way that you think.
If you’re not familiar with the phrase, Bitcoin dominance is a percentage that tracks Bitcoin’s market cap against the entire crypto market.
But when Bitcoin dominance is high, it doesn’t mean that people are becoming greedy. The inverse is actually true. That’s because when traders are greedy, they tend to move their Bitcoin funds to riskier alt-coins. When traders are fearful, they tend to take their profits from alt-coins back into the safe-haven asset of the crypto market, Bitcoin.
Finally, the fear and greed index also analyzes changes in search trend data. More specifically, the index looks at how search volumes for Bitcoin and related terms are changing over time.
Okay, now you know what the Bitcoin fear and greed index is as well as how it’s calculated. But should you start using it to inform your crypto trading decisions?
There are a lot of good reasons to keep your eye on the Bitcoin fear and greed index. But, as is the case with any single metric, the greed index should be part of your arsenal instead of the whole thing. In other words, it’s best to use the index alongside other metrics instead of relying on it completely.
So, how can you benefit from using the index? Let’s take a look.
The main value proposition of the Bitcoin fear and greed index is to provide investors with a quick and easy way to gauge crypto market sentiment over time.
It pulls in data from six useful sources, performs calculations based on them, and presents that information in a way that’s incredibly easy to digest. All that you need to do is look at a scale and see if the number is closer to fearful or greedy.
The index is also a nice backstop you can use to verify some of the buying and selling decisions that you make in crypto. It will help you determine if the market is bullish or bearish.
For example, maybe you’re interested in purchasing Bitcoin right now. Before doing so, it could be a good idea to check out the fear and greed index. If the index says that the market is extremely fearful, you’re buying at the perfect time.
But if it says extremely greedy, you may want to hold off on your purchase — even if you’re feeling fear of missing out.
The Bitcoin fear and greed index is managed by Alternative.me. You can find it by visiting this link to find the company’s website.
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