Developed by CNN business, the Fear and Greed Index has added a new tool to every trader’s arsenal.
Whether it’s the stock market or the crypto market, you will often come across this index that many traders use to make their trades.
FGI (Fear and Greed Index) is based on sentiments depicted in a statistical format allowing a direct capitalization of market sentiments into actionable stats.
So naturally, this index is also being extensively used in the Crypto market.
However, it is important to understand what this index is all about before you can effectively use this index.
What is the Crypto Fear And Greed Index?
When there is fear in the crypto market about any crypto, investors are worried that the prices of that particular crypto will fall. The general market takes that the future of that crypto is uncertain, which is likely to drive down the prices of that crypto even further.
Similarly, if the market is acting greedy about crypto, investors generally like the crypto’s position and think it will go upward in the future. So, again, this will likely create buy pressure in the market for that particular crypto pushing the prices even higher.
How does the Crypto Fear and Greed Index work?
This index is comparatively easier to understand and insightful. This index works on a scale of 1 to 100 and is divided into four parts:
- 0 – 24 – Extreme Fear
- 25 – 49 – Fear
- 50 – 74 – Greed
- 75 – 100 – Extreme Greed
When the index is between 0 to 49, it depicts fear in the market, with the crypto prices likely to fall further. When the index is between 50 – 100, the market is in greedy mode, while the crypto prices are likely to rise even further.
This index is updated daily based on various factors, including market trends, volatility, etc.
What influences the Crypto Fear and Greed Index?
Here are various factors that influence this index. Let’s look at some of those factors below:
- Market momentum and volume
FGI compares the market momentum and volume with the 30 and 90-day average constituting 25% of the index rating. While FGI only considers BTC now, it’s more likely to adopt more cryptocurrencies in the coming time.
Also, high momentum and volume mean more buy pressure and will cause a surge in the index and vice versa.
- Market Volatility
By comparing the market volatility and maximum drawdown of prices with 30 and 90-day periodical averages, FGI inclines towards fear with extreme volatility pointing towards uncertainty in the market. Market Volatility also contributes 25% of the FGI.
- Social Media Analysis
Twitter has noted over 40 million active users in recent times. These stats in themselves point towards the massive reach of social media. Naturally, social media analysis becomes important to understand the overall market sentiments.
The way the users react, the content being shared, and overall sentiments directly impact the prices of cryptocurrencies. For example, a negative statement by an influencer regarding a cryptocurrency can push it toward a downward spiral.
- Market Surveys
With the help of massive weekly surveys, FGI can understand market sentiment. For example, when more users are eager to take a survey about a cryptocurrency, it generally points towards impending market greed leading to higher prices.
As a result, the market Survey contributes around 15% of the FGI score.
FGI, if used wisely, can help you in trading. These two conclusions can be driven by analyzing FGI, which can act as a rule of thumb when using FGI for trading.
- Extreme greed points towards over-pricing that will lead to a correction in the market prices. Thus, if you spot the FGI pointing towards greed, you should find your moment to sell and cash out your holdings.
- Extreme fear points towards market uncertainty and can be used to make purchases.