General information: The Fear and Greed Index is an indicator that assesses the sentiment of the cryptocurrency market. The indicator is based on CNNMoney’s Fear and Greed Index, which is used to evaluate the stock market.
The scale ranges from 0 to 100. If the arrow drops below 49, the indicator indicates a negative market sentiment and oversupply. When the arrow rises above 50, the indicator signals market greed and the possible formation of a financial bubble.
How does the Fear and Greed Index work? Currently, the indicator only works with BTC, which is the locomotive of the entire cryptocurrency market. It calculates a new value from 0 to 100 every day.
The indicator scale is divided into several categories:
0-24: Extreme fear
25-49: Fear
50-74: Greed
75-100: Extreme greed
The values of the indicator are calculated from a combination of fundamental and technical factors, each of which has its own coefficient of influence on the indicator. Let’s look at these factors:
Market volatility (coefficient: 25%). Volatility is calculated from the average price of BTC over the last 30 and 90 days.
Trading momentum and volumes (coefficient: 25%). Trading momentum and volumes are compared with the previous 30 and 90-day values, and then combined. Huge purchases indicate greed and a positive sentiment among investors.
Social activity (coefficient: 15%). The indicator tracks the number of BTC-related hashtags on Twitter. A strong increase in social activity usually indicates heightened greed.
BTC dominance (coefficient: 10%). The indicator tracks BTC’s dominance over the rest of the cryptocurrency market. A rise in dominance indicates the emergence of new buyers in the market and/or the redistribution of funds from altcoins.
Google Trends (coefficient: 15%). Analysis of Google Trends data for BTC-related search queries, which also allows for an assessment of sentiment in the cryptocurrency market.
Conclusion:
The Fear and Greed Index combines several fundamental and technical factors, merging them into one index, which facilitates market analysis and provides a general understanding of sentiment. Thus, using this indicator can save time and not track all these indicators separately.
Remember, no single indicator can show the perfect entry or exit point from the market, but it can be used as one of the guides when making decisions.