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The cryptocurrency market has a reputation for its volatility and difficulty to predict trends, both short-term and further into the future. There are key indicators that help track historic movements and trends, while others look at the sentiment surrounding the market, looking at what investors, traders, experts and the community are saying about the potential future of the industry. The Fear and Greed Index is one of the indicators that looks at what the market’s possible movements might do.
What does fear and greed mean in crypto?
The Crypto Fear and Greed Index calculates a value based on how people are responding to the market. A single value is generated between 1 and 100, with a lower value indicating that there is a significant amount of fear that the market is slipping and people are probably going to sell to protect their funds from a bear run. On the other hand, a higher value indicates positive sentiment in the market with people showing greed (likely to buy more assets) if the market is likely to show a rally or correction upwards.
What is “fear” in the crypto market?
“Extreme fear” on the index is when the value of the index lies between 0 and 24. Between 24 and 50 represents “fear” in the market. In these cases, the sentiment surrounding the market is negative and people are worried about the values of the cryptocurrency market falling and are likely to sell their tokens.
What is “greed” in the crypto market?
On the other side of the coin, “greed” is represented between 51 and 74 on the index. “Extreme greed” occurs between 75 and 100 and represents extreme positivity surrounding the cryptocurrency market. In these cases, people are worried about missing out on the boat to buy prices before they surge, indicating a strong sentiment surrounding the possibility of a bull rally in the crypto scene.
How does the Fear and Greed Index work?
To calculate how much Fear or Greed is in the market, the index takes a number of factors into consideration. For example, a high number of search phrases in the market (such as Bitcoin or crypto-related search terms) across search engines indicates a strong sentiment with investors looking to buy or showing interest in what the market is doing. This metric typically makes up 10% of the Index value because Bitcoin-specific search terms on Google are historically linked to extreme volatility in the price of the leading cryptocurrency.
Other factors to calculate the Fear and Greed Index include results from surveys each day that take participants answers into consideration, looking at how people actively perceive the health of market. The market’s movement itself also makes up a fair portion of the index value, looking at which direction the market is going – and whether there is momentum or whether there are shifting values across the industry. Additionally, the media and coverage in the market hold weight on the index. Engagement with the news and media across news platforms and social media are considered in this.
What is the index used for?
While some indicators are used for long-term trading considering overall future trajectory trends, the Fear and Greed Index is mostly used for daily trading. It takes note of what the sentiment is regarding the market and might imply that prices will rise (if the greed value is high) or dip (if the fear value is strong), which might help investors decide whether to exchange, buy, sell, or hold their cryptocurrencies. Looking at how strong the fear or greed is on the index might help traders choose how much to move (buying, selling, or trading) depending on the possible volatility of the market.
The Index does not consider technical and fundamental analyses so is not a strong indicator of long-term trends.