All You Need to Know About the Crypto Fear and Greed Index
The Fear and Greed Index is a relatively new phenomenon in the world of trading. It was created by CNN Money as a way of measuring how much traders are willing to spend on stocks during times of fear or greed.
The Index is a helpful tool that, combined with other indicators, can help you decide when to buy and sell bitcoin.
What is It and How is It Calculated?
Fear and greed are two predominant emotions in human psychology that can influence investor behavior. The Bitcoin market is no exception to this. Hence why market sentiment awareness is important to helping us decide the right time to enter or exit a position.
On the surface, investors generally follow the Index based on the theory that excessive fear tends to drive down the price of bitcoin and too much greed pushes the price up.
The assumption is that extreme fear increases selling pressure for bitcoin, driving the price down and presenting a buy opportunity for investors. On the other hand, extreme greed drives up the demand for bitcoin, hiking up the price and offering a good selling opportunity.
The Index accumulates data from multiple sources to generate a number. This number is measured on a scale ranging from 0 to 100, where 0 indicates maximum fear and 100 total greed.
Within the 0 to 100 scale, the Index is classified in four basic categories:
0 to 24 = Extreme Fear,
25 to 49 = Fear,
50 to 74 = Greed,
75 to 100 = Extreme Greed.
At the same time, the Index extracts data from the following sources to calculate the score:
- Volatility, which compares the current value of bitcoin to its average value over the last 30 days and the last 90 days.
- Market momentum and volume of bitcoin traded over the last 30 and 90 days.
- Social media sentiment, or what people are saying about bitcoin on social media.
- Bitcoin’s share of the crypto market against all the other cryptocurrencies (also known as Dominance).
- Search trends across relevant Bitcoin search terms to identify substantial periods of growth or decline.
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