Bitcoin Fear And Greed Index
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What is the Bitcoin Fear And Greed Index?
The Bitcoin Fear and Greed Index is a parameter that shows investors’ desire to buy BTC and thus indicates where the crypto market is most likely to go.
About the Botcoin Fear And Greed Index
The Bitcoin Fear and Greed Index provides a score from 0 to 100, where 0 is extreme fear, and 100 is extreme greed. The «fear» zone is observed in the bear market (and this could be seen in June and July this year), and the «greed» zone – in the bull market. At the same time, the closer the index value is to 0, the sooner the bearish trend will change to a bullish one, and if the index is close to 100, this means a rapid change in the trend from bullish to bearish.
In a simple way, the index can be interpreted as follows: if the index value is low, it means that people are afraid to buy bitcoins, keeping their money. Then there are few buyers and many sellers in the market. Prices fall, becoming more attractive for purchases. Such a situation cannot last forever, and eventually investors decide to buy and buy again, driving the uptrend. With «greed» everything is the other way around: the more «greedy» investors there are in the market, the fewer sellers, and sooner or later there will be no one to sell. In this case, investors who have entered the cryptocurrency begin to lower prices, starting the downtrend.
The Bitcoin Fear and Greed Index scale is divided into the following categories:
0-24 – «extreme fear»: When there are no buyers in the market and there are many sellers, which is a sign of a possible trend change;
25-49 – «fear»: People are no longer panicking and there is no massive selling, but the bullish rally is still far away;
50-74 – «greed»: The bulls have woken up, and they clearly show that there will be no selling in the market in the near future;
75-100 – «extreme greed»: Bulls reign over the whole market and a correction can be expected soon. It is too late to buy; you have to take profits or stay out of the market, waiting for a correction and then a return to growth.
Between mid-May and the end of July, the Bitcoin fear and greed index value was in the range of 10 and 30, and, in fact, we witnessed a bear market. And in the fall of last year, an uptrend in the Bitcoin fear and greed index began, and then the index was at highs until April 20, 2021. It was a strong bull run for bitcoin and other cryptocurrencies, with new all-time highs among many coins.
How the Bitcoin fear and greed index is calculated
The Bitcoin Fear and Greed Index calculates the value by combining six different weighted market factors:
- Volatility (25% of the index);
- Market momentum / volume (25% of the index);
- Bitcoin mentions in social Networks (15% of the index);
- Surveys (15% of the index): temporarily not taken into account in the calculation;
- Bitcoin dominance index (10% of the index);
- Trends (10% of the index).
Volatility. Current upturns in the price chart and downturns are measured. The obtained values are compared with the averages of the last 30 and 90 days. If a high value is observed, it is concluded that the market is «nervous» and investors feel uncertainty. In other words, the logic is as follows: if the price is rising and everything is fine, there should be no sharp ups and downs, then investors buy in a stable manner. If there are sharp swings, up one moment, down the next, then investors are in doubt. The concept of volatility in the markets means the rate of change of price per unit of time.
Momentum / market volume. This parameter measures the dynamics of the market and the trading volume. Momentum is the difference between the market closing price in the current time period and the closing price N periods ago. Momentum can also be called the «power» of the market: the rate of price change in one direction. The current value is also compared to the previous 30-day and 90-day averages.
Social networks. Rather, the social network Twitter. The number of Twitter hashtags related to bitcoin are collected and analyzed, and how quickly the hashtag receives response from other users and how many people comment on a post with the hashtag over a period of time is checked. The high number of responses and the speed of interactions signify a growing interest in BTC and, consequently, the «greedy» market.
Surveys. The websites strawpoll.com and alternate.me conduct surveys of 2000-3000 people, based on which they present conclusions about market sentiment. At the moment, the surveys are conducted but are not taken into account in the calculation of the index.
Dominance of bitcoin. It measures the ratio of bitcoin’s market capitalization to the total capitalization of all other currencies. As over time BTC continues to prove its credibility in the cryptocurrency world (and in finance in general), high bitcoin dominance is considered a sign of investor uncertainty about market growth. When the opposite is true (dominance is low), the public is very interested in altcoins, which means that investors believe prices will rise.
Trends. Google Trends search queries related to bitcoin are analyzed. It is not the frequency of queries as such that is especially important, but the change in frequency (their decline or fall). On the basis of these data it is also determined in which state the market is in: in «fear» or in «greed».