Understand Bitcoin Market Sentiment with Fear and Greed Index 

The crypto space is dominated by market sentiment which itself is guided by investors’ emotions such as greed and fear. During strong price changes in the market, people show greed or FOMO (fear of missing out) behavior and make hasty investment decisions. The fear and greed index takes into account the psychological background of these investors to evaluate the dominant sentiment of the Bitcoin market.

What is the Fear and Greed Index? How does it work?

The fear and greed index, an indicator of market sentiment analysis, was originally developed by CNN Business for the stock market. To measure how emotions affect the stock market, this index uses a scale ranging from 0 (extreme fear) to 100 (greed) while a number of 50 is considered neutral.

Alternatively, leading websites showing crypto trends, took inspiration from this and created a fear and greed index for the crypto market. The crypto fear and greed index determines which emotion, fear or greed, drives investors and on that basis, assesses the overall sentiment of the market. The main purpose of this index is to help traders, analyze Bitcoin or other crypto markets, and make smarter decisions.

The fear and greed index uses a combination of factors, assigns a weight to each, and then aggregates the results into a single number. The index scale ranges from 0 to 100. Lower scores (shown in red) represent fear in the market. Conversely, a high index score (shown in green) implies the market is on the upswing and greed is rampant. This scale is further divided into four categories:

• 0 – 24 = Extreme Fear
• 25 – 49 = Fear
• 50 – 74 = Greed
• 75 – 100 = Extreme Greed

Extreme fear in the crypto market indicates the coming of a bearish trend, which means that the price of the asset is falling. In this situation, investors are afraid of the crypto market crashing, and therefore sell their coins. However, this is seen as an ideal opportunity for other investors to buy into the dips.

As expected, a score of 50 on the scale is considered neutral. When the index measures ‘extreme greed’, it shows traders are getting greedy and accumulating more crypto. This caused the price of the coin to skyrocket. Many investors take advantage of this market time to profit by selling cryptocurrencies. However, if the score reaches 100, the index implies the end of the bull market and a correction is imminent.

It should be noted that the era of fear index (score between 0-49) shows the undervaluation of cryptocurrencies. On the other hand, the era of greed index (50-100 score) characterizes the overvaluation of a cryptocurrency. The index is updated every 24 hours.

How is the Fear and Greed Index Measured for Bitcoin?

Factors contributing to the Bitcoin market fear and greed index are provided below:

It is known that the crypto market is unstable. Extreme fluctuations in the price of Bitcoin (high volatility) signify a nervous market where investors are afraid. This index calculates the current volatility of Bitcoin, and then compares it to the average volatility values ​​of the previous 30 and 90 days. 25% of the index results are based on the current volatility factor.

• Market Momentum/Volume

The parameters of this index take into account market momentum (the market’s ability to sustain long-term price trends) and the current trading volume of Bitcoin. In cases where high trading volume exceeds market momentum, it indicates many investors are participating, and there is an atmosphere of greed in the market.

The fear and greed index measures market momentum/volume by comparing current statistics to the average of the last 30 and 90 days. This factor makes up about 25% of the index.

The index leverages current social media technology to analyze Bitcoin market sentiment. Social media platforms, like Twitter, are overflowing with crypto

enthusiasts who continue to observe the ups and downs of the market.

The index tracks tweets containing hashtags mentioning Bitcoin. By analyzing the speed and level of interaction on these hashtags over a certain period of time, the index measures the mood of the market. The greater level of interaction from people on these hashtags indicates that the market is entering greedy territory. 15% of the index results are brought about by this parameter.

Surveys provide information about the current mood of crypto market participants. The index calculates this factor using a third-party website that conducts weekly surveys with a sample size of around 2000-3000 people. Surveys account for 15% of the final index result.

As Bitcoin is the most traded digital currency in the market, the index uses its shift in dominance to gauge overall market sentiment. If Bitcoin dominance is high, it could be interpreted as a sign of a scary market where traders choose the safest assets.

On the other hand, if greed prevails in the market, it corresponds to a decline in the dominance of Bitcoin as investors turn to riskier assets, such as altcoins. This factor makes up 10% of the index value.

Analyzing the frequency of google entries related to Bitcoin is an effective approach to evaluate the mood of the market. If, for example, the number of queries asking “Bitcoin price manipulation” increases, it indicates a scared market. In contrast, the search query “Bitcoin price prediction” indicates that the market is going up. This parameter makes up 25% of the index value.

Rather than predicting long-term market movements, fear and greed indices are used as daily indicators. Index values ​​can help investors evaluate Bitcoin market sentiment. Index values ​​represent opportunities for day traders to enter or exit the crypto market before other markets follow suit. However, investors should not base their decisions on this single indicator tool. Other analysis, such as fundamental and technical analysis should also be considered.

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