As we have entered 2022, there is no denying that at the start of this year and last year, there has always been something that has captured the ambiance and imagination of the financial world: cryptocurrency.
Cryptocurrency is the most popular and with high volatility and uncertainty in the digital currency world. Crypto-related decisions are often turned out to be the function of impulse, greed, and fear. And this is where there arises a question of what is the crypto fear and greed index.
The acceptance of digital currency has exponentially surged within the last two years. It has increased to the extent that the word “crypto” was used 6.6 million times on Reddit during 2021, along with being the most viewed topic this year.
So, Let’s see in-depth about what is the crypto fear and greed index?
What Is The Crypto Fear And Greed Index?
Based on the calculation of investors’ sentiment towards the digital financial market, the crypto fear and greed index indicates whether the market is high(bullish) or low(bearish).
“extreme fear” means that investors are apprehensive, but it can also mean a good buying opportunity.
When the index denotes that investors are getting too greedy, the market is due for a correction.
How Does It Work?
The crypto fear and greed index demonstrated a score between 0-100. A low score will indicate more fear in the market- the score will appear in red. It also means that more investors are selling their assets, so the cryptocurrency market is dipping.
But, a high score means that greed is high- the score will appear in green, which means more people are buying.
“Extreme fear” is a term used when the score is between 0-24, a 25-49 score denotes “fear” in the financial market. And a 50 score indicates a neutral condition, a score between 51-74 suggests “greed,” and a score between 75-100 is termed “extreme greed.”
What Is The Index?
The fear and greed index collects the information depending upon volatility, volume, social media posts, and crypto coins demands.
The crypto index first came into the spotlight in January 2018, and since then, it has been used to track the overall sensibility of the financial market. And it also tells when it is a good time to divest from or invest in digital currencies. Volatility constitutes 25 percent of the index. The current volatility of the digital coin and top dropdowns are taken and compared with the average value of the last 30-90 days.
An unexpected rise in volatility is a sign of a fearful market. The market volume also constitutes 25 percent of the total index. The present volume and the market moments are measured and compared with 30-90 days. If there is a favorable market of high purchasing volume regularly, then the market is considered greedy.
Social media posts also play an essential role in cryptocurrencies, and it has a 15 percent weight in the index. The data is viewed and calculated by tracking Twitter hashtags and focussing on social media interactions.
Dominance makes up 10 percent of the index weightage. A crypto coin’s presence in the market cap of its entire market is its dominance. Plus, the index is also affected by Google trends. They track the variations in search volumes and other current popular searches.
How To Use Crypto Fear And Greed Index For Trading?
The crypto fear and greed index is functional because it shows when it is a good time to Invest in Cryptocurrencies and when it is not. The price of digital currencies often experiences a hike in value in a bull market. And as I earlier mentioned, this can be a good opportunity for investors to purchase more coins when the value is low.
Investors should also estimate the market’s overall sentiment when making their investment decisions. Thus, the Crypto fear and greed index is a good tool for analyzing this sentiment. It is a valuable tool as it will indicate when it is an excellent time to buy and when it is an ideal time to sell.
The crypto fear and greed index helps understand about and also What Is Crypto Market Cap condition but only to some extent. However, any decision to invest or withdraw cannot be based entirely on the index. It would be best to look for fundamental analysis and technical analysis advice.