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It is funny how sentiments can change so quickly. Looking back to the height of the 2017/18 bull run I remember how I was ‘investing’ in various altcoins to chase the heights. Only to see a large percentage of my portfolio fall, and fall down to some scary lows in the coming bear market.
Now here we are again. In another bull run. This time we retail investors have some powerful company with us, with the likes of Elon Musk, Michael Saylor, and some serious institutions helping to front-run this bull run.
But it is not just a clear straight line upwards. We’ve seen some serious corrections in this run, as per the previous cycles have too. Corrections or dips of around 20-40% have been common. With every dip, the sentiment quickly changes for the worse.
“This is it. The bull run of 2021 is over”
“I know that $60,000 was gonna be the ATH”
And so it goes on.
To put these things into perspective there is an interesting tool that captures the overall market sentiment, which is the Crypto Fear and Greed Index.
When times are tough fear is used to capture our emotional states
And when things are looking bright greed is used
The Crypto Fear and Greed index is not only a tool that captures what you and tons of other investors are feeling right now, but for some investors/traders it is a tool that helps them understand when the bottom is in and when it is time to buy in again.
Because mistake not, corrections are absolutely normal in any bull market and the big players in the market are going to make full use of that. Every time the market gets a bit too hot they sell, and then the correction happens (they push for it).
With enough fear in the market the correction goes deeper and the traders can then buy in again at a much cheaper price. And so it goes on and on.
Now, why is this important and why should you care? Well I think it is important no matter what strategy you have, to trade or to hold, that you understand how the market works. How the market makers think and act.
It is useful to be aware of these things as they are scare tactics and put into place to sell high and re-buy lower.
The CNN Fear and Greed Index
The original (CNN) Fear & Greed Index was developed by CNN Money. And it is today extremely well-known in the investment and business sectors. And it captures the emotions that flood the markets in an easy overview visual index.
It is based on seven indicators in the market:
- Stock Price Momentum: Following the S&P 500 index moving average
- Stock Price Strength: The number of stocks hitting 52-week highs and lows (NYSE)
- Stock Price Breadth: The trading volume, if it’s on the rise or declining
- Put and Call Options: The ratio of Put / Call options on the market
- Junk Bond Demand: The spread between yields on investment grade bonds and junk bonds
- Market Volatility: The average volaitility on the market captured by VIX index.
- Safe Haven Demand: Is there an increased interest for safer investments (stocks versus treasuries)
Like any tool, index or chart it is not meant to provide us with clear instructions for how to act and how to invest.
But it does give you an indication of what the rest of the market is doing.
And similar to the CNN Fear & Greed Index there is an equivalent Index for the cryptocurrency market.
The (Bitcoin) Crypto Fear and Greed Index
Similar to the index developed by CNN, there is a equivalent index for the cryptocurrency market.
The (Bitcoin) Crypto Fear & Greed Index.
It is based on other indicators (of course) than the CNN Index. And today the index is only for Bitcoin and the Bitcoin market.
The indicators that forms the result of the crypto Fear & Greed Index are:
- Volatility (25%): Measuring the volatility on the market compared to the past
- Market Momentum/Volume (25%): Current market volume and momentum measured and compared to the past (30/90 day average)
- Social Media (15%): Today measuring Twitter activity and volume + frequency are the key indicators used here
- Surveys (15%): The website strawpoll.com are running weekly crypto polls asking visitors to provide their picture of the market (getting 2000-3000 votes weekly)
- Dominance (10%): Here Bitcoin’s dominance is measured. With the concept of increased BTC dominance caused by fear, as Bitcoin is seen as more of a safe haven compared to altcoins. And with decreased BTC dominance this means people are focusing on “riskier” altcoins
- Trends (10%): Here Google Trends are measured. Looking into search volumes for Bitcoin-related searches are measured and compared with past volumes.
So the indicators are slightly different, and they are also different because of the generational changes between the stock market and the cryptocurrency market (crypto vs stock market).
How can I use the Crypto Fear & Greed Index?
Ok, so there is an index that represents the overall fear and greed in the market, but what does it mean for how you should buy, sell, trade or hold?
How can you take advantage of the Crypto Fear & Greed Index and either:
- Improve your crypto-stack?
- Find underpriced assets?
- Find overpriced assets?
- Learn and improve your trading and strategies?
These are a few potential examples of motivations that (almost) every crypto trader has.
I mean besides of having fun we all want to make money if we see the Bitcoin and crypto market as an investment opportunity.
So the questions is then how can you use the Crypto Fear & Greed Index?
Well the main outliners are when there is either extreme fear, or extreme greed. Often when there is extreme greed the market is overbought and potentially overpriced.
Meaning we could see a correction at some point.
And vice versa when there is extreme fear it could be a sign it is oversold and time for a rebound.
Here below we can see when there is extreme fear…
And here we can see extreme greed…
But like any instrument or tool, it is extremely hard to just rely on that indicator only and base any investment decisions on it.
Doing that would still be more of a gamble than a smart investment strategy.
There are too many unknowns, and other factors that plays in.
But it can help you as a reminder to not get carried away.
When things looked as bleak after Bitcoin’s and the cryptocurrency market big drop after the bull run to $20,000 USD and subsequent fall down to the low $3000s we should have stayed calm and potentially seen it as a great investment opportunity.
Similar to the height of Bitcoin at $20k and the 2017/18 crazy rush to altcoins we should have seen it as signs of what could come and not engage in FOMO investing.
Most markets moves in cycles. Larger macro cycles which describes the overall market sentiment. And within those macro cycles we can also see micro cycles.
For example the recovery of the stock market during current coronavirus crisis can portray the micro events that is happening.
But overall we can still that we are in a downward macro cycle.
- When extreme greed is in place = cryptocurrency market could be overbought and people tend to rush to altcoins with greed/*hope clouding their views
- When extreme fear is in place = people tend to avoid riskier investments, from getting out of altcoins to avoiding the crypto market entirely
- Fear & Greed Index can be used to capture market cycles and see where we are currently
*Hope has been used as another way to try and describe the emotional state of investors. And I personally think it is a combination of both.
It probably depends on the investor and the experience they have. And things are rarely black or white just.
“Greed, for lack of a better word, is good.”Gordon Gecko
This famous quote is from the film Wall Street where famous investor Gordon Gecko describes the emotions of the market
“Buy when there’s blood in the streets, even if the blood is your own.“Baron Rothschild
And this famous quote was phrased by Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family.
And the purpose of this investment strategy is obviously clear. When there is fear then there is your opportunity. And I guess this is overall true. Bad times calls for opportunities.
Similar to how the current effects of the coronavirus is causing havoc on the world’s economies it probably is also opening up for new investment opportunities to be found, and used.
It is now the experienced investors and traders wants to come in and (probably) worsen the situation to maximise the gains.
Don’t make any investment decisions only from the Crypto Fear & Greed Index. Don’t make any investment decision just from one single index, chart, Social Media post, comment, etc.
But do take in the knowledge and information presented to you via this index, and others. And do engage with other investors, survey the forums and Social Media and make all of the information generated there a part of your overall learning and strategy-building.
And understand that when you are feeling the strong emotions to either side, understand that they are just emotions. And understand that they are happening to everyone.
My own plan is to have a long-term investment plan, that I continuously re-evaluate. And I tend to not make any quick investment decisions. I am comfortable with this.
I am comfortable knowing I don’t need to chase the quick gain and potentially miss out on the 20x opportunity.
What is your investment strategy?
And do you use the Crypto Fear & Greed Index today? If so how? Tell us in the comment section below!
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Hello and welcome to Go Cryptowise.
My name is Per Englund and I’m a long-term fan and investor and trader of Bitcoin and other cryptocurrencies. I caught the attention of Bitcoin like many other several years ago, but it was first around 2016/2017 that I truly got into cryptocurrencies and blockchain technology.
I have since traded, bought, researched and learnt about this new emerging space to the fullest. When not producing crypto-content I create and design new products and businesses. And I want to combine my business experience with my passion to create meaningful content for all our readers.
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