Supply and demand are the two major driving forces for any market. But there is also one invisible driving force which plays a crucial role especially in this age of digital world and communication is “sentiment”.
The market behavior of Bitcoin, the world’s largest cryptocurrency, is also extremely emotional and sentimental. Traders or investors in this space tend to get avaricious when the market is rising which also results in FOMO or fear of missing out, as they do not want to miss out buying Bitcoin to make profits. Also, people often hastily sell their Bitcoin as soon as they witness red numbers.
The Bitcoin Fear and Greed Index is a great invention as it tries to save such Bitcoin traders from their own irrational emotional overreactions which can impact the overall Bitcoin market.
Let’s know more about Bitcoin Fear and Greed Index and how it works.
What Is Bitcoin Fear And Greed Index?
Bitcoin is the first and the largest cryptocurrency in the world. Launched anonymously in January 2009 by a group of tech experts, Bitcoin is now a widely recognized and one of the largest globally traded financial assets with daily trading volume measured in the billions of dollars.
However, its regulatory status is quite shaky and unsteady in most of the countries including India. But, for many crypto enthusiasts, Bitcoin is the real poster boy of cryptocurrencies which has helped them make enormous profits in such a short span of time.
Bitcoin is also one of the most traded cryptocurrencies, but due to its highly volatile nature, it is very difficult to anticipate the next move of Bitcoin or its trading pattern. This is where the Fear and Greed Index for Bitcoin comes into the picture. The Bitcoin Fear and Greed Index is an effective tool which aids in measuring and assessing the market sentiment of the world’s largest cryptocurrency, Bitcoin.
Emotions highly impact the perception of buying and selling of cryptocurrencies, including Bitcoin. Emotions such as bullish, bearish, FOMO are quite commonly used when one deals or trades in Bitcoin. To help Bitcoin traders to understand the emotions in a more objective way, the Bitcoin Fear and Greed index helps them to gauge the market sentiments of Bitcoin at a specific given time.
Key Features of Bitcoin Fear And Greed Index
- Analyses the current market sentiment of the Bitcoin investors or traders collectively.
- Based on several metrics such as volatility, market momentum, volume, social media and dominance to find fear or greed in the Bitcoin market.
- Studies the market sentiments in the state of high fear or extreme greed.
- Helps Bitcoin market participants to take informed decisions.
- Calculated on a yearly, monthly, daily and weekly basis.
How Bitcoin Fear And Greed Index Works?
Bitcoin Fear and Greed Index measures the market sentiment of Bitcoin on a scale from 0 to 100, where a value of 0 means “extreme fear” and a value of 100 represents “extreme greed”. Thus, the index is based on two very simple and basic assumptions:
- The lesser the score, the more fearful market participants feel about the future of Bitcoin. This could be a buying opportunity.
- The higher the score is, the more confidence market participants feel about the future of Bitcoin. This also means the market is due for a correction or a perfect timing for profit-making.
This index is mainly based on factors such as market volatility, volume and dominance, social media sentiment, surveys and search data in relation to Bitcoin. Let’s understand the state of fear and greed via real-life examples:
- Extreme Fear: In November 2022, when Bitcoin crashed two-months low after FTX fallout, the Bitcoin Fear and Greed Index showed a value of 12, which means the extreme caution zone in the Bitcoin market.
- Extreme Greed: However, when in February 2021, Bitcoin surged on the news of Elon Musk’s announcement of Tesla’s huge investment in Bitcoin, the index spiked to a whooping 92 out of 100, depicting extreme greed for Bitcoin in the market. Whereas in the latest example, Bitcoin which was trading in “fear” since mid-2022, has crossed the range of $20,000, and thus moved out from “fear” scale to “neutral” after a long gap of almost nine months.
Moreover, the Bitcoin Fear and Greed index is divided into the following four categories:
Bitcoin Fear And Greed Index
(As on January 18, 2023)
Source: alternative.me
What Does Bitcoin Fear And Greed Index Take Into Account?
Volatility: Volatility is a crucial factor which determines the calculation of index on a daily basis. Since, Bitcoin is a highly volatile asset which means any rise in volatility will take the score to fearful markets, and less volatile will reflect greed in the market.
Momentum and Volume: High momentum and high trading volume in Bitcoin shows that the market is too greedy or bullish on Bitcoin.
Social Media: Another great predictor of Bitcoin Fear and Greed Index is social media. We all are aware of this fact that Bitcoin is one of the most searched cryptocurrencies on social media, tagged along with a lot of interactions and hashtags. Infact, a high interaction rate of Bitcoin on social media platforms such as Facebook, Twitter and Telegram. depicts greedy market behavior for Bitcoin.
Bitcoin Dominance: Dominance of Bitcoin also plays a major role in identifying fear or greed in the market. Especially for Bitcoin, the rise in dominance means fear in the market as the market participants are considering Bitcoin to be the safest haven of cryptocurrencies and this reducing the value of altcoins, which are considered as highly speculative. On the contrary, if the dominance of Bitcoin shrinks, which means that traders are becoming greedier and more bullish on altcoins.
Trends: The index also takes google trends into consideration while calculating fear and greed in the Bitcoin market. For instance, if the trend analytics shows that a keyword like “rise in Bitcoin manipulation” has been searched a greater number of times, then this might depict “fear” in the Bitcoin index. Or if there is a high volume search on keyword “buy Bitcoin”, which shows “greed” in the market.
Whales: The Bitcoin Fear and Greed Index also analyzes the investments made or pulled by the Bitcoin whales in the market via their digital wallets. These large investments or more Bitcoin stored in whales’ wallets signifies that the rally in the market is about to come as the whales are bullish on market and will gradually sell when the crypto market will show some upside move.
Benefits Of Bitcoin Fear And Greed Index
- Helps in rational decision making as trading on emotion is not a very wise and prudent strategy. The Bitcoin Fear and Greed Index helps to provide valuable insights on the market and help traders to make rational decisions.
- The index also helps you to read between the lines which exist beyond the headlines. Thus, index helps you to assess Bitcoin in a more efficient way rather than just depending upon the current market news.
- The Bitcoin trader can use this tool along with other significant analytic tools to gain a better understanding of Bitcoin moves and can assess its current trading patterns.
Limitations of Bitcoin Fear And Greed Index
- Limited Scope: This indicator can be considered as the tool to measure the market sentiments of Bitcoin, but does not provide a holistic view of the market. It only takes the short-term aspect and thus can be used along with other investment tools and valuation metrics.
- Unable To Forecast Future Events: Bitcoin Fear and Greed Index only takes into account the past events, data or news which has already happened. It gauges the sentiments purely on the basis of things which have already happened. Thus, the index is not able to forecast future events which might have a huge influence in your decision making.
Bottom Line
Remember, Bitcoin Fear and Greed is a mere indicator that helps you to understand the mood of the current Bitcoin market. But, when it comes to Bitcoin trading, then it is advisable for you to consider other analytical tools and valuation metrics also which helps in providing a more holistic and long-term perspective about the Bitcoin market.
