What Is Crypto Fear and Greed Index

3 min read

In the best and the worst times of the crypto market, when every price seems to plummet or go sky high, you always hear from different people about the crypto fear and greed index. If you don’t know what it actually is, you’re in luck! Because in this post, we’re going to see what a fear and greed index is and how it works. When we’re done, you can decide for yourself if paying attention to this index when buying or selling cryptocurrencies is a good idea or not.

What is fear in a financial market?

When prices start to go down or bad news hit the market, people start to panic. This panic is usually accompanied by a sell-off.

So prices go down, people panic and start to sell, prices go down more because of this selling, people panic more and the sell-off continues because of the growing supply. In this situation, prices can be lower than the perceived value or worth of the assets.

What is greed in a financial market?

When prices start to go up or good news hit the market, people start feeling happy, even euphoric. They don’t want to sell, because they think the prices will go higher and some even want to buy more so that they don’t miss this great run.

So prices go up, people don’t sell and want to buy more and prices continue to go up because of this growing demand. In this situation, prices can be higher than the perceived value or worth of the assets.

What is a fear and greed index?

Fear and greed index tries to measure how people feel about a market or even a certain asset. It gives us a number between 0 which is extreme fear and 100 which is extreme greed. When this number is below 50, we get into the fear category and say the market is fearful. And when it’s higher than 50, we get into greed and say that the market is greedy.

Extreme fear can be an indicator that the local bottom is in and prices will go higher from here. In contrast, extreme greed can be indicator that the local top is in and prices will go lower.

You can also read:
Crypto meaning and types of cryptocurrencies (+why you should care)

How are fear and greed measured?

Different people and organizations, use different things to get a clear picture of fear and greed. For example, alternative.me uses these things to gauge the crypto market and give us a crypto fear and greed index:

Volatility
Market Momentum/Volume
Social Media
Surveys
Dominance
Trends

You can read the details on their own site.

Is crypto fear and greed index a good indicator?

Like any indicator that is tied directly to supply and demand or the psychology of the trade, fear and greed index can be pretty reliable. But if you want to know exactly how reliable, I would say that it depends on many things, as is the case with most indicators. But you can definitely use fear and greed in combination with other indicators to understand the market better and decide when to buy or sell.

All this aside, the best use of this indicator for me is that it helps me control my emotions and stick to my trading/investing plan instead of following the herd.