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Buying is not to be feared: what is the cryptocurrency Fear and Greed Index?

What is the Fear and Greed Index?

The Fear and Greed Index (Fear and Greed Index or FGI) is a popular indicator that reflects the general mood of investors in the crypto market. Crypto investors and traders use the FGI to determine the so-called "market temperature": the lower the Fear and Greed Index, the "colder" investors are to buy and vice versa. Fear and Greed Index came from the stock market and appeared on the crypto market only in 2018.

The Fear and Greed Index is an analogue of another overbought and oversold index (RSI) popular among traders. Like the RSI indicator, the Fear and Greed Index is measured on a scale from 0 to 100, where:

  • 0 — marginal level of fear;
  • 100 — the ultimate level of greed.

The indicators rarely reach the limit values, but the closer they are to them, the higher the probability of a price reversal or trend.

In what cases is FGI useful?

The Fear and Greed Index is particularly relevant for trading and short-term investing, as cryptocurrencies are highly volatile, which correlates with rapid changes in investor sentiment. Using the Fear and Greed Index gives traders and investors advantages in risk management and forecasting the price of digital assets.

However, the fear and greed index is not suitable for long-term investors as it does not take into account many fundamental indicators, such as:

  • developer activity,
  • project roadmap,
  • launch of new products and features,
  • interest from institutional investors and others.

Fear and Greed Index is suitable only for technical analysis of quotes and determination of short-term trends.

How the Fear and Greed Index works

Conditionally, the index indicators can be divided into 3 zones:

  • fear,
  • neutral,
  • greed.

If the index is 40 and below, it may indicate a bearish trend, and panic moods, better known as FUD (fear, uncertainty and doubt), begin to prevail in the market. FUD encourages holders to sell their assets, even if they take losses. The lower the fear index, the more bearish the mood of investors and traders.

A reading above 60, on the contrary, reflects bullish sentiment or the level of greed of investors and traders, also called FOMO (fear of missing out). Under the influence of FOMO, investors continue to buy the asset even though its price has already increased significantly and may collapse at any moment.

The scale of the fear and greed index is conventionally divided into only 5 parts:

  • 0 to 20 — Extreme Fear. The asset is excessively oversold, and the price may rise at any moment. The market is dominated by panic sentiment or FUD. This area may be an excellent time to buy the asset, but it may be too risky to go short at this time;
  • 21 to 40 — Fear. The asset is oversold, and there is still a downside risk;
  • 41 to 60 — Neutral. Investor sentiment is mixed: during this period, it is difficult to determine which way the trend will be;
  • 61 to 80 — Greed. The stock is overbought, but there is still upside potential;
  • 81 to 100 — Extreme Greed. The stock is overbought, and the price may collapse at any moment. Investors are significantly exposed to FOMO at this time. Buying cryptocurrency or opening long positions (longs) during extreme greed is too risky.

Where do you view the Fear and Greed Index?

Fear and Greed Index can be tracked using special services such as Alternative and BTCTools. Popular cryptocurrency monitoring tools CoinMarketCap and Coinstats also provide Fear and Greed Index data.

In addition to the current value, Fear and Greed Index data can also be viewed for past periods, which allows you to assess the current situation and dynamics to predict future asset behaviour. Some of the above services even display correlation charts between the price of cryptocurrency and the value of the Fear and Greed Index, which provides more data for analysis.

Remember that each service uses its own data set, based on which the Fear and Greed Index is displayed. The most common data used by services to estimate the FGI are:

  • volatility,
  • trading volume and market momentum,
  • derivatives markets,
  • social surveys and other indicators,
  • bitcoin dominance index,
  • Google Trends data,
  • and even individual queries.

Market momentum and volatility data typically comprise the bulk of the FGI index at 25% each. The rest of the indexes carry less weight, averaging between 10% and 15%.

However, the data of the services may differ, so for a complete picture, the best solution is to track the fear and greed index from different sources and focus on the average values. For example, when one service displayed an index value equal to 75, the index of another service was 79. At the same time, the third service showed 89 points, corresponding to the level of "extreme greed".

© BestChange.com – , updated 12/08/2023
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