Beyond the Crypto Fear and Greed Index


Many people are aware of the CNN Money Fear and Greed Index. I’ve written about it here and here. It can be an excellent tool for helping investors navigate the emotional ebbs and flows of public stock markets. Fewer people are aware there’s the same type of index for the cryptocurrency market called the Crypto Fear and Greed Index. Why should you pay attention to this index? What are the components, and what makes it useful? Let’s take a look beyond the Crypto Fear and Greed Index to see what makes it tick.

Understanding Emotions

One of the goals of the Fear and Greed Index is to save you from yourself. The other purpose is to take advantage of others not able to protect themselves from themselves. Does that make any sense? We are playing with our emotions all day long, and markets are an excellent place to watch these emotions play out on a global scale. When fear is high, it could be an indication that panic is in the air, and prices are too low. A buying opportunity could be just around the corner. Greed is high when prices feel like they will never fall again. Over-optimism can get out of control, and there’s danger in over-paying for your investment. This would be a good time to exit.

Understanding Fear and Greed is one of the most challenging things to do in markets. It’s also one of the most important. One of the greatest investors of all time, Jesse Livermore, understood how emotions drive markets. He profited from it over and over again. He’s been proven correct so far when he said this quote one hundred years ago,

“Patterns repeat, because human nature hasn’t changed for thousands of years.”

Jesse Livermore, 1925

Recognizing when extreme fear and extreme greed are taking place in markets is a skill worth pursuing. You will be able to use this skill for the rest of your life if Livermore continues to be correct in his conclusion.

Components

Each day the folks at Alternative.me attempt to analyze sentiments and emotions from the world of Bitcoin. Plans are in the works to create separate indexes for other prominent altcoins soon, but for now, they focus on Bitcoin only. The Crypto Fear & Greed Index combines data from five sources to produce a daily index measurement. These sources are Volatility, Market Momentum & Volume, Social Media, Trends, and Dominance. Below is the current index reading, updated daily.

Latest Crypto Fear & Greed Index

Volatility

The good people at Alternative.me measure bitcoin volatility using it’s current price relative to the average values over the last 30 and 90 days. An unusual rise in volatility could mean a potentially fearful market. One good tip to remember, however, is low volatility does not equal low risk. Bitcoin volatility spiked in March after the markets tumbled worldwide. Bitcoin hit a low price of $3,600. Since then, volatility has been steadily falling while the price of bitcoin has been rising. The price of bitcoin has more than doubled since the volatility high in March. Even after the halving last week, volatility continues to ease from the recent highs. Volatility makes up 25% of the crypto fear and greed index.

Crypto Fear and Greed Index
Bitcoin ATM Implied Volatility. Image credit – CoinTelegraph.com

Market Momentum and Volume

The crypto fear and greed index is also measured in market momentum and volume. The creators of the index argue that when buying volumes are high in a positive index, it suggests an overly greedy market. The current volume is measured against the volume of the previous 30 and 90 day periods. Market momentum carries a 25% weighting in the fear and greed index.

Social Media

One of the most unique and exciting indicators compiled in the fear and greed index is the social media weighting. 15% of the index is calculated off sentiment gathered from Twitter. By counting posts mentioning specific hashtags for each coin, a tweet activity level is recorded. They also watch for how fast tweets receive interactions within particular time frames. Increased activity levels on Twitter show keen public interest and could be a red flag for greedy market behavior. Some of the tweets below show the debate which rages continually through Twitter and other social media platforms. The index gurus are working on a Reddit sentiment analysis, but they’ve yet to unleash it to the masses through their index.

Dominance

The crypto fear and greed index includes market dominance as 10% of it’s weighting. The total market cap share of the bitcoin divided by the market cap of all the crypto coins added together shows a vote of confidence, or lack thereof, in bitcoin. I love this indicator because it goes a few levels deep into the crypto-verse. Years ago, there was much debate about what the dominant coin would be. Ethereum, Litecoin, who would emerge as the king of the crypto coins? This debate has cooled in the last few years as bitcoin has made it’s place at the top of the chain, as they say.

The dominance weighting in the crypto fear and greed index is explained like this. A rise in the market cap of bitcoin relative to other coins shows fear, as there is a reduction in speculation in “smaller” coins, and money moves to the “safe-haven” bitcoin. When bitcoin market cap drops, the market may be getting greedy by pumping up alt-coins anticipating the next big move up is near.

Put yourself in the shoes of the other coins, and it could work in reverse. Say when the Ripple market cap begins to swell versus bitcoin, it could indicate excessive greed for that specific coin, since Ripple is not viewed as a safe-haven such as bitcoin.

Trends

Trends is the final indicator making up the crypto fear and greed index. 10% of the weighting comes from measuring Google Trends data from search queries. Changes in search volumes give a peek inside the minds of all those emotional beings out there making investment decisions. Various bitcoin search terms and phrases are used, such as “bitcoin price manipulation.” An increase in a term such as this would show fear inside the minds of potential buyers and sellers.

crypto fear and greed
Crypto Fear & Greed Index over a 3 month period. Image credit – Alternative.me
crypto fear and greed
Bitcoin price chart over a 3 month period. Image credit – TradingView.com

Crypto Fear and Greed Index and Decision Making

As you can see in the two charts above, the crypto fear and greed index mirrors the bitcoin price chart reasonably closely. Over the last three months, there was an extreme drop in bitcoin price corresponding with a spike in fear. Over the previous two months, bitcoin price has risen while the fear and greed index has also increased. Investors have been getting more greedy over the last month or two. An index such as this should not be used solely for buying and selling decisions, but it *can help you along the way. As I always say, the crypto fear and greed index should never be used to make financial decisions, that’s what your know-it-all, fast-talking brother-in-law with an MBA is for.