Due to the volatile nature of the crypto market, it is very difficult to predict the future price fluctuations of cryptocurrencies. However, the Fear and Greed index, like many other indicators, can be used to gain reasonable insights into the possible future price fluctuations of these assets.
If you’ve ever held or traded cryptocurrency, you might already have a rough idea about the Crypto Fear and Greed Index. This index is used to understand the market sentiment of any cryptocurrency at any given time.
Before using the index, it is necessary to understand how it works and what tells you about the market.
Calculating the Crypto Fear and Greed Index
There are a few key factors that are considered when the Crypto Fear and Greed Index is calculated. Let’s take a brief look at those key factors.
As is apparent by the name, trends include Google trends data in the index, which shows us the search interest of a cryptocurrency on the Google search engine. Increased Google trend numbers indicate increased greed in the market. Google Trends data makes up 10% of the total index value.
The Crypto Fear and Greed Index conducts weekly surveys of the crypto market. These surveys include thousands of participants, and increased survey ranting of a crypto asset caused the index numbers to increase. Since increased survey enthusiasm indicates increased greed, survey data makes up 15% of the total index value.
The index keeps an eye on the momentum of the crypto market. It calculates 1-3 month averages to see where the momentum of the industry is headed. High trade volume and increased momentum cause the final index value to increase. Momentum makes up 25% of the final index value.
The index continuously calculates and notes the 1-3 month volatility and decrease in crypto prices. High market volatility indicates increased market fear and increases the total final index output as well. Volatility makes up 25% of the total index value.
The index also has an automated system to detect the number of hashtags and mentions of a cryptocurrency and compare them to historical averages. An increased average number of hashtags and mentions of a cryptocurrency indicate an overall increase in the market involvement of more users and increases the final index output. It makes up 15% of the final output.
The index also measures the dominance of a cryptocurrency in the current market. Index interprets increased Bitcoin market dominance as an increase in the overall fear. This causes altcoins to gain more momentum, and the market becomes confident. Decreased Bitcoin dominance makes the market more fearful and greedy. Dominance makes up 10% of the final value.
Reliability of the Crypto Fear and Greed Index
If you’re planning on using the Fear and Greed Index for crypto trading, you need to keep few things in your mind.
If you use indicators like the fear and greed index, you’re more prone to short-term capital gains tax. This is one of the most important things you should consider before making important trading decisions.
If you’re a regular trader, you can benefit by gaining index insights and applying them to your daily trades. Long-term investors might suffer from losses in the long run by ignoring major rallies and missing great opportunities.
You should also consider whether you are a technical or a fundamental trader. That is because the Fear and Greed Index is considered as a technical indicator, and doesn’t consider the fundamentals of a cryptocurrency when calculating the final index value. For the traders looking at the macroeconomic indicators for trading, this index might become obsolete and irrelevant.
In conclusion, the Fear and Greed Index provides valuable information about the immediate state of any cryptocurrency in the current market. As an investor, you have to do proper research and find out if the index can be of any use to you or not.