The Fear and Greed Index Bitcoin (BTC) is among the most popular indexes used by investors and traders in the cryptocurrency market. This tool works as a multifactorial crypto market sentiment analysis that lets investors know which is the current sentiment about Bitcoin.
The next sections will cover all the information that you need to know about the fear and greed index. We will cover how indicators and indexes work, why they are important for investors, and how the Fear and Greed Index Bitcoin became one of the best ways to understand what the market feels about BTC.
Understanding Indicators and Indexes
Before we get into the details of how the Fear and Greed Index Bitcoin works, we should understand how indicators and indexes work. According to the Corporate Finance Institute, a market indicator is a quantitative tool that investors and technical traders use to better understand financial data and forecast market movements.
This can be applied to most types of financial assets in the market, from stocks and currencies to Bitcoin and other digital assets. These indicators let investors make better decisions according to what the market shows. However, this is different from an index, and therefore, they are used in different ways.
Indeed, an index can be analyzed using technical indicators and other types of financial tools. Investopedia explains that an index is a method used to track the performance of a group of assets in a standardized way. For example, an index could be the S&P 500. The S&P 500 is used as one of the benchmarks to understand which is the general sentiment of the financial market.
Let’s put it this way, if the S&P 500 moves higher, it means that, on average, most stocks that form the S&P 500 are moving higher. The same happens if the S&P 500 moves lower. But there is no such index for crypto markets. One could take some small indices that measure the movement of most cryptocurrencies or a basket of coins. However, these are not very popular.
At UseTheBitcoin, we have created a full guide on how to trade indices. This guide shares with you all the information you should have about indices in traditional financial markets. This can also be applied to Bitcoin and other virtual currencies, but you will have to find the correct index to analyse crypto markets.
Indexes and Indicators in the Cryptocurrency Market
Now it is time to get into the details of which indices and indicators we can use in the cryptocurrency market. Let’s not forget that this guide focuses on the Fear and Greed Index Bitcoin rather than on other indices. Nonetheless, we cannot ignore the importance of other tools that help investors analyse the market. Additionally, the Fear and Greed Index Bitcoin is just one of the many indices that could be used to get a better idea of what is happening with the largest cryptocurrency in the market.
When it comes to indicators, cryptocurrency analysts use the same ones that can be applied to traditional financial markets. Therefore, if you are a trader in traditional financial markets (forex and stocks), then you can be sure that there are no specific indicators used for virtual currencies.
Investors can use the RSI, Moving Averages, Exponential Moving Averages, the MACD, Fibonacci retracement and extension levels, trendlines, Ichimoku Cloud, and many others. The number of indicators is very large and can be used by traders that never traded in the crypto markets.
Now, when it comes to indexes, the cryptocurrency market has seen the creation of multiple indices, but none of them was able to gain the necessary traction to become a benchmark for how the crypto industry behaves. These indices are usually traded on different algorithmic platforms that let investors purchase a basket of assets in the crypto industry.
The Coinbase Index, also known as CBI, is one of the many indexes in the cryptocurrency market that track a basket of assets. In this particular case, the CBI tracks the performance of those digital assets listed on the Coinbase exchange. It is worth taking into consideration that these virtual currencies are then weighted by their market capitalization. This provides an accurate way to get valuable information about the crypto market.
But there are other indexes that can be used. We will not focus on them in this post as we want to get into the details of the Fear and Greed Index Bitcoin.
What is the Fear and Greed Index Bitcoin?
It is now time to answer the question: what is the Fear and Greed Index Bitcoin?
The Fear and Greed Index Bitcoin is, as the name suggests, a multifactorial crypto market sentiment analysis tool that gives information to traders and analysts about the current sentiment about Bitcoin.
The Fear and Greed Index Bitcoin ranges between 0 and 100. The lowest values represent “fear” in the market, while the highest values represent “greed.” The Crypto Fear and Greed Index is currently presented by Alternative.me and it is updated on a regular basis.
At the same time, investors and traders can get regular updates about the market by following the official Twitter account of the Bitcoin Fear and Greed Index. Rather than posting spam, the Fear and Greed Index Bitcoin Twitter account shares regular updates about the index with information about Bitcoin’s price.
The Crypto Fear and Greed Index is a very useful tool to understand the emotions of the people in the crypto market. The moves highly depend on the performance of BTC in the market and what people feel and think could happen in the near future. Despite the fact that the Fear and Greed Index Bitcoin tends to track Bitcoin’s performance, it is less volatile than Bitcoin’s price.
If Bitcoin’s price fluctuates a lot, the Fear and Greed Index Bitcoin would not move as much as Bitcoin’s price. Therefore, it could be used as a more accurate way to measure what is happening in the market and what people feel about it.
Finally, it is also worth pointing out that the Ethereum Fear and Greed Index has also been developed. Nonetheless, this index is not as popular as the one that tracks Bitcoin’s sentiment in the market, but it is always good to have more indices that track the sentiment of specific digital assets.
How to Use the Fear and Greed Index Bitcoin?
But how to use the Fear and Greed Index Bitcoin? Fortunately, it is very easy to use this index. Investors can only follow and see how the index evolves and use it to have a better idea of what is happening in the market. It is usually said that technical traders should also consider fundamentals when making investment decisions. The Bitcoin Fear and Greed Index could help.
The index is very useful in order for investors to understand what the market feels. For example, if you are a trader and you see that the market is skyrocketing, then, it could be a good thing to check this index and see what’s the situation in the market. The Fear and Greed Index Bitcoin could be a good way for you to avoid entering a FOMO phase and buy the top.
The same can happen if the market is falling and everyone sells BTC. For traders that have BTC and don’t know what to do with them when the market falls, the Bitcoin Fear and Greed Index could be a great way for you to avoid selling when the market is bottoming.
Indeed, extreme fear conditions could signal that it might be a good moment to buy. Instead, extreme greed conditions show that it could be a good moment to sell. This is not financial advice and all the information that you find in this post is for educational purposes only. We are not financial advisors.
For professional traders, the Fear and Greed Index Bitcoin can be used with other technical tools and fundamentals. It is another index to have a look at to get additional information about the current situation in the market.
How is the Bitcoin Fear and Greed Index Calculated?
Alternative.me gives clear information on how they measure and how they calculate this index. The Bitcoin Fear and Greed Index is calculated by gathering data from volatility, market momentum/volume, social media, surveys, dominance, and trends.
Each of these sources is then weighted according to its importance. Volatility, for example, represents 25% of the index. Alternative.me measures the volatility in the market and compares it with the average values of the last 30 and 90 days. An “unusual” rise in volatility could show fear.
To measure market momentum or volume (25%), the team behind this project measures volumes and compares them with those volumes of the last 30 to 90 days. High buying volumes show greed and high bearish volumes represent fear.
Social media also plays a key role in the Fear and Greed Index Bitcoin. Indeed, it represents 15% of the results of this index. The team runs a Twitter analysis tool that gathers specific keywords and hashtags for Bitcoin.
“An unusual high interaction rate results in a grown public interest in the coin and in our eyes, corresponds to a greedy market behaviour,” says Alternative.me
There are also surveys that help the team at Alternative.me to get better and more accurate results. Despite the fact that at the time of writing this article the Surveys are paused, they are used to represent an important part of the index. These were surveys that included between 2,000 and 3,000 market participants.
Dominance is also an important thing to take into consideration. When they measure dominance, they analyse the market cap share of Bitcoin compared to other digital assets. When Bitcoin’s dominance falls, people get more greedy (investors search for riskier assets). Instead, when Bitcoin’s dominance grows, the market could become more fearsome.
Finally, Google Trends represent a key factor when it comes to creating the Fear and Greed Index Bitcoin. They take into consideration the change in search volumes and recommended other popular searches.
Therefore, these are the sources of data that are measured by the Crypto Fear and Greed Index:
- Volatility (25%)
- Market Momentum/Volume (25%)
- Social Media (15%)
- Surveys (15%)
- Dominance (10%)
- Google Trends (10%)
Why are Emotions Important when Trading Bitcoin?
Every single trader knows that trading with emotions is always a bad thing. People that want to succeed in trading must take their emotions out, otherwise, they risk losing their investment and making wrong investment decisions.
For example, if the market has been falling for weeks, and Bitcoin retraced by 75%, it might be possible that we could be close to a bottom. If Bitcoin stops falling and buying volumes surge, some people might still sell. These people that are guided by fear might decide to sell at the bottom rather than at the top, which could create financial losses for them.
Now, if Bitcoin registered a 1,000% increase in a period of 6 months, then, we should pay attention to a possible top. This does not mean, however, that Bitcoin could not register another 1,00% increase or an additional 50% drop. The market is telling important information, which can be analyzed through different indicators and indices.
In this particular case, the Fear and Greed Index Bitcoin is a great tool for traders to avoid FOMO when Bitcoin is moving higher fast and to avoid selling at the bottom when Bitcoin falls.
Why Does Bitcoin Move Higher or Lower?
Bitcoin moves higher for different reasons. Over the last years, we have seen a strong impact of macroeconomics and geopolitics on Bitcoin. Macroeconomic trends became very important to understand why Bitcoin moves higher or lower.
For example, when COVID-19 hit the world, governments printed large amounts of money and reduced interest rates to negative levels. In the short term, this did not create a problem with inflation, however, in the mid-term, inflation rates moved higher.
During the period of time in which governments followed a relaxed monetary policy, Bitcoin surged and reached new highs. As soon as central banks showed that they were ready to start cutting interest rates, Bitcoin reached a top and started a bear trend.
There are many other reasons why Bitcoin could move higher or lower. News and other types of market events could have a short-term impact on the price of Bitcoin. When Tesla announced that it purchased Bitcoin, the price of the virtual currency skyrocketed, the same happened to the Bitcoin Fear and Greed Index.
When Tesla announced that they sold part of the Bitcoin they purchased, the market reacted negatively to it and Bitcoin fell.
Final Words About the Fear and Greed Index Bitcoin
The Crypto Fear and Greed Index is among the most popular indices for the cryptocurrency market. It is usually used for Bitcoin and it gives valuable information about the market situation. The index has been developed by Alternative.me and it is among the most popular tools for investors to understand what the market thinks about Bitcoin. Over the last years, this index became a great tool for investors to have a better understanding of the whole crypto market.