Bitcoin Fear and Greed Index Explained
Bitcoin Fear and Greed Index Explained
What if there was a way to know the collective sentiment of investors in the cryptocurrency market? This will be especially helpful in a market as volatile as the cryptocurrency markets. This is where a Bitcoin fear and greed index indicator comes in. It is an indicator that tracks several metrics in the Bitcoin market to determine what the overall sentiment is. In today’s article, we will take a look at what exactly the Bitcoin fear and greed index is and how it can help cryptocurrency investors navigate the uncertainty of the highly volatile cryptocurrency markets.
FOMO and FUD
There are two main driving forces that influence the prices of coins in the cryptocurrency market and they are fear and greed. When people fear what happens in the market, or fear that they may lose all of their money, they will sell their cryptocurrency holdings to reduce the risk of them losing the value that they have invested in cryptocurrency. On the other hand, if the price of a cryptocurrency is rising, people will rush in to invest in it because they believe that the trend will continue. These two driving forces in the market have led to the creation of the terms FOMO and FUD. Let’s take a look at what each term means.
FOMO applies to the market when the price of a cryptocurrency is rising and people rush to invest in it because they believe that the trend will continue. During these periods in the market, you will get a lot of people that are very optimistic about the chances of the upward trend in prices continuing. In times when the market does boom like this, the majority of investors are afraid of missing out. They, therefore, have the fear of missing out on the opportunity, which leads to FOMO. FOMO is an acronym for Fear Of Missing Out.
Now, when the prices of cryptocurrencies go down, it results in investors panicking in the market. They panic because they’re afraid of losing the value that they invested in the cryptocurrencies in their investment portfolio. This panic results in investors selling their cryptocurrency which then pushes the prices down even more. In times like this in the cryptocurrency market, there is a lot of uncertainty as to whether the prices of cryptocurrencies will recover or if they will continue to fall. This is also normally the time when all of the skeptics in the market make an appearance and put even more doubt regarding the recovery of prices in the marketplace, leading to a lot of selling pressure. FUD applies to markets when there is a lot of selling pressure and is an acronym for Fear, Uncertainty, and Doubt.
Bitcoin as the Cryptocurrency Gold Standard
In case you didn’t know, the value of each government-controlled currency was linked to the government’s gold reserves. Meaning, the more gold coins and bars a government holds, the more value their fiat currency has, and vice versa for smaller gold reserves. This is called the gold standard. Gold was, and probably is still, the most stable form of value storage that people can invest in, which is why it was used to determine the value of fiat currencies. Nowadays, the value of fiat currencies is determined by other factors in a governments’ jurisdictions and circles of control, and gold is no longer used.
So, why did we just discuss the gold standard? Well, simply because there is a similar situation to the gold standard from back then that can be witnessed in the cryptocurrency markets. Bitcoin currently plays the role in the cryptocurrency markets now that gold used to play when determining the value of government-controlled currencies. As the price of a Bitcoin coin increase, the prices of the other coins in the cryptocurrency market tend to follow a similar trend. The same applies when the price of a Bitcoin coin goes down, as the prices in the rest of the cryptocurrency market follow suit.
Although the price of Bitcoin is not nearly as stable as that of Gold, it is the most well-known cryptocurrency in the market. Everyone has heard about Bitcoin, but not many people have heard about coins like SUSHI or ADA for example. As a result of its popularity and how many people know about it, most of the funds in the cryptocurrency market are in Bitcoin. So if anything happens to Bitcoin’s price, the rest of the market feels the effect just because of the difference in the volume of funds. This is why the trend in Bitcoin price is often simulated in the prices in the rest of the market.
So now that we have gone over what the gold standard is and how Bitcoin acts as a gold standard in the cryptocurrency market, let’s take a look at what the cryptocurrency fear and greed index is.
The Bitcoin Fear and Greed Index Explained
As you may recall, the Bitcoin fear and greed index is an indicator that tracks the overall investor sentiment in the Bitcoin market. Basically, it is a way to track if people are optimistic or fearful of what will happen in the market. If people are fearful of what will happen in the market, they will sell their cryptocurrency holdings so that they don’t lose any of the value that they invested in cryptocurrencies when the prices fall. On the other hand, if people are optimistic of what will happen in the cryptocurrency market, they will increase the amount of cryptocurrency that they have in their investment portfolio with the hope of increasing the value invested as prices rise.
The Bitcoin fear and greed index is a helpful tool to gauge what might happen in the market as it takes a look at several market metrics. Let’s take a look at what Bitcoin market metrics are used for the market’s fear and greed indicator.
Metrics Used To Calculate the Bitcoin Fear and Greed Index
At the moment, there is only an index for Bitcoin since it is like the gold standard in the cryptocurrency space. Building on this, other metrics have been included to calculate the market index. These metrics include volatility, market momentum/volume, social media, dominance, and trends.
This is calculated from the volatility and maximum drawdown of Bitcoin’s price compared to the 30-day and 90-day average volatility. There is enthusiasm in the market if volatility increases.
Similar to the volatility calculation, market momentum/volume is based on momentum and trading volume. The 30-day and 90-day moving averages are compared. If there is a lot of volume on the buy side it shows a lot of investor greed and the market is booming at this point.
This is calculated using the hashtag for each cryptocurrency and looks at the rate and number of responses for each hashtag.
The market cap of a cryptocurrency can be used to determine a cryptocurrency’s dominance. The more dominant a cryptocurrency is, the more influence its price movements will have on the rest of the market’s prices.
A couple of trends can be used for this analysis. The main trend used for a fear and greed index however is how many times Bitcoin-related keywords were included in online searches. If the number of these searches increases, then it means that there is an increased interest in the cryptocurrency market.
So how does the fear and greed indicator actually work? Let’s take a look at how to read a cryptocurrency fear and greed index.
Reading the Fear and Greed Index
The Bitcoin fear and greed index has scores in the range from 0 to 100. A lower score is indicative of fear in the market which means that more investors are selling. This selling activity results in falling prices in the market. A higher score means that the overall greed in the market is high and people are buying cryptocurrencies. This rush to buy Bitcoin leads to a booming cryptocurrency market. A score between 0 and 24 shows extreme fear in the market, and 25 to 49 shows fear in the markets. The market is considered neutral if the score is 50. A score of 51-74 is a sign of greed and a score of 75 to 100 indicates extreme greed.
Normally, when the indicator shows extreme conditions, the market tends to cool off and head towards the opposite extreme. For example, when the market is in extremely fearful conditions (score between 0 and 24), the score will rise as the market transitions towards extreme greed conditions. The opposite is true when the cryptocurrency fear and greed indicator indicates extreme greed conditions.
Bitcoin Fear and Greed Index: Conclusion
The Bitcoin fear and greed indicator is a technical indicator that helps investors in the cryptocurrency markets know what the overall sentiment is in the market taking Bitcoin as the base, that is; if investors are fearful or greedy in the market. It’s a useful tool to help investors gain a better understanding of what may happen to prices in the near future.
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