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What is the Bitcoin Fear and Greed Index?


As a cryptocurrency trader, you will eventually encounter the “Crypto Fear and Greed Index.” This article explores this valuable tool, provides insights on how to utilize it, and outlines its significance to your cryptocurrency investments. The original “Fear and Greed Index” was formed by CNNMoney to gauge investor sentiment in the stock market. The index is measured daily, weekly, monthly, and yearly. The idea is that investors can decide whether or not a stock market is priced correctly. Excessive fear drives down prices, while greed tends to have the opposite effect. 

How the Fear and Greed Index Works 

To understand how to use the Crypto Fear and Greed Index, you need to know how the original one works, as it is simply an extension of that indicator. It is used as a way for investors to gauge the market. This indicator is based on the idea that stocks tend to trade far below their intrinsic value when there is excessive fear, while they will trade far above their intrinsic value when there’s unbridled greed. 

How is the Crypto Fear and Greed Index Calculated? 

As the crypto markets mature, it makes sense that they started using some more traditional tools. Understanding the psychology of the market goes a long way in determining whether the market is in a sustainable move or if things have been “overdone.” In a market like crypto, this can be especially useful as the momentum can be so strong.  When calculating the Crypto Greed and Fear index, there will be different inputs as it is an entirely different market. The following information is used to come up with the calculation: 

How Do You Read the Crypto Fear and Greed Index? 

The Crypto Fear and Greed Index is straightforward. It’s a numerical value between 0 and 100, with zero being the most fearful end of the spectrum and 100 being the most greedy. Think of the 50 level as being “balanced.” If the market has a reading below 50, it could mean that the market might be undervalued and ready for an upswing. On the other hand, if the reading is above 50, the market is experiencing greed, and it could be overvalued and ready for a pullback. 

That being said, a reading of 52 is not extremely greedy. However, a reading of 93 would be. For fear scores, 48 is not important, but a fear score of 2 should get your attention.

There are a lot of advantages to using the Crypto Fear and Greed index. Some of the major ones include: 

What Are the Disadvantages of The Crypto Fear and Greed Index? 

While the Crypto Fear and Greed Index can be helpful, nothing is perfect. There are a few things to keep in the back of your mind when using this tool, including: 

How to Use the Fear and Greed Index When Trading 

There are multitudes of ways traders can use this index, but one of the most common ways is to allocate your trading capital based on how the market is trending and when perceived “value” may be entering the market. For example, Bitcoin could be in a downtrend, and the Crypto Fear and Greed Index could be in an extremely low reading. If you are an investor, at this point, you may be looking to buy a bit more, with the understanding that the index itself does not guarantee a bounce, but it suggests that perhaps the selloff is a bit “overdone.” Furthermore, if you are a short-term trader, you may play the bounce more aggressively, assuming you have a technical or fundamental setup. 

Beyond that, traders will often use this indicator to tell them when to take profits or perhaps simply go from crypto to cash. If you see that the markets are trending down and the index is starting to drift lower, it may be time to close out positions and go to cash, waiting for a more suitable market to be involved in. 

Is the Fear and Greed Index Reliable?

The Fear and Greed Index can be reliable depending on your timeframe. Over the short term, it’s often observed that if the market leans too far in one direction, it will act as a pendulum and go on the other. For example, if we see a very bearish market with extreme fear built into it, a swing in the other direction could be coming soon. If you are a longer-term investor, it may not be as reliable or potentially significant. The index will  be much more helpful if you are more short-term focused. 

The Fear and Greed Index is a technical indicator, so you should keep in mind that it does not consider any fundamental factors in its final calculation. If you invest in crypto based on a macroeconomic outlook, the index may be irrelevant to you.

Conclusion 

Ultimately, the index should be thought of as confirmation of existing technical or fundamental analysis.You cannot trade based upon this index alone, as it is not easy to quantify. The market will likely reverse if things get overextended in either direction. There’s no reason to ignore the index, as it is easily found on various websites. That being said, if you find that you are in a position that has moved significantly, it does not hurt to check it. There are multiple versions of the Crypto Greed and Fear Index out there, so if you are a swing trader, you can buy and sell your CFDs if the market swings too far in one direction, allowing you to maximize potential profits. 

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