What does extreme fear mean in crypto?
While it's hard to anticipate the future movements of crypto assets with 100% accuracy, indicators like the Fear and Greed Index can help.
The Crypto Fear and Greed Index generates a single value between 1 and 100. If the value = 1, it means that the crypto market will fall as people are experiencing severe fear and selling their holdings.
On the other hand, a higher number of 100 means that the market is due for a correction, and people are experiencing excessive greed (i.e., buying more assets). So, how does the Crypto Fear and Greed Index work?
Extreme fear arises when the value of the index lies between 0 and 24. Anything above 24 and under 50 represents fear, and the value of 50 means neutrality in the market. On the contrary, greed arises when the value of the index lies between 51 and 74; however, if the value hikes over 74, such as 75 or above, it represents extreme greed.
Emotions drive the cryptocurrency market. When the market rises, people become greedy, resulting in the fear of missing out (FOMO). Also, when people see red numbers, they frequently sell their coins as an impulsive reaction.
How is the Crypto Fear and Greed Index calculated?
Various Crypto Fear and Greed Index signals that influence the behavior of traders and investors include Google trends, surveys, market momentum, market dominance, social media and market volatility.
To determine how much greed is trending in the market, examine trending search phrases. For instance, a high volume of Bitcoin-related searches means a high degree of greed among investors. This factor accounts for 10% of the index value. Historically, increases in Bitcoin-specific Google searches have been correlated with an extreme volatility in crypto prices.
To calculate the number each day, the Bitcoin Fear and Greed Index considers a few other factors, such as surveys, which account for 15% of the index value. Surveys with participants of over 2000 drive the index value higher, indicating the presence of greedy investors.
Market momentum refers to the market's ability to maintain a long-term price trend and represents 25% of the index value. This examines the market's health and direction. The index's greed side takes momentum into account.
Dominance examines the cryptocurrency's market dominance in the overall crypto industry. For instance, the greater Bitcoin's dominance, the fewer alternative cryptos exist. However, a drop in Bitcoin dominance suggests increasing greed and accounts for 10% of the index.
It's no wonder that social media has a 15% influence on the index because it's currently one of the most significant aspects of our life. On the greedy end of the spectrum, aspects like hashtags, engagement, themes and mentions across several social media networks are considered.
A quarter portion (i.e., 25%) of the index is made up of market volatility. It examines a cryptocurrency’s current price (such as Bitcoin’s price) and compares it to recent price movements over the previous 30–90 days to determine how volatile the market is. In the index, volatility is used as a fear indicator.
How do you trade with fear and greed?
The Crypto Fear and Greed Index is used more as a daily indicator than as a tool for long-term trading.
Using the index as a trend indicator will help you to invest in crypto wisely. For example, when the Fear and Greed Index value is low, it may imply that the cryptocurrency price will rise, and you can decide if you want to buy, hold or sell. Usually, rising prices mean that it is a good time to sell.
However, when the index value is high, it may indicate that the cryptocurrency price will fall soon and represent a good time to buy. Therefore, cryptocurrency sentiments drive when the price rally or a local low will occur in the market.
As the index enters the zone of acute anxiety, it tends to reverse. This is the point at which fear transforms into the first indications of greed before exploding into full-fledged greed.
The Cryptocurrency Fear and Greed Index aids the tracking of shifts in market sentiment. For example, large swings in the market may give you the chance to enter or exit before the rest of the market follows suit.
The index does not operate well for long-term analysis of crypto market eras. Instead, there are repeated rounds of fear and greed inside a long-term bull or bear market. However, swing traders will benefit from this market movement. A speculative strategy in which investors buy and hold assets to profit from market movements that are expected is called swing trading.
Does the Fear and Greed Index provide reliable insights into the future price of cryptocurrency?
The Fear and Greed Index is only concerned with the analysis of sentiment; technical and fundamental analytics are unaffected by market participants' emotions and hence, are the more preferred methods of predicting a market movement.
If you are a long-term investor and you rely upon the Crypto Fear and Greed Index, you may miss significant price rallies. On the other hand, the Fear and Greed Index is a valuable tool for a day trader who plays different buy and sell positions within a short time.
If you have chosen to be a day trader (based on the Fear and Greed Index), then you should also be aware that any income from crypto trading is subject to the capital gains (short-term) tax.
You are a fundamental trader, and you want to use the Fear and Greed Index to guide your investment decisions; then, you may end up losing your money because the index is suitable for technical traders.
Although the Fear and Greed Index provides insights into the state of the crypto market at the exact moment it portrays, individual traders or investors should do their research concerning the tools suitable for their investment goals.
How to balance greed and fear to be a successful trader
Lowering your trading sizes, having a trading plan, recording a trading journal and learning from others will save you from the influence of extreme fear or extreme greed.
Price swings are less noticeable on prominent (or large) trades and this makes large transactions more stressful. Therefore, it is crucial to lessen the size of your trade to balance your emotions and trading decisions.
Having a clear trading plan is the path towards being a successful trader. Without a plan, one could risk losing money due to over-leveraging their crypto portfolio.
Recording trading activities to understand what is working for you or vice-versa helps you to make rational decisions. The trading journal helps you to learn from your own mistakes, and yeah, practice makes one perfect!
It is essential to analyze the trading activities recorded in a journal to weed out the irrelevant and polish the productive. Keep your emotions aside while doing so, if you want to be a successful trader.
Learn from your peers or successful investors like Warren Buffet. But ensure that you avoid the herding strategy as it will influence your emotions, and you may lose your money.
You can also read published reports by credible sources like Coinbase or PayPal to improve your knowledge about the market. For instance, Coinbase sends alerts from time to time about price dips or price increases, which may assist you in making investment decisions.