Due to the speculative nature of investments, cryptocurrency is a highly volatile asset. According to research by Crypto.com, India has over 10 million users, while global crypto investors totaled 106 million in January 2021.
“The cryptocurrency market’s behavior is highly emotive. When the market is rising, people become greedy, resulting in FOMO (fear of missing out). Also, people frequently sell their coins in an emotional reaction to seeing red numbers,” according to Alternative.
me, a business that created the Crypto Fear and Greed Index to study and quantify emotions and attitudes from various sources.
What is Crypto Fear And Greed Index?
The Crypto Fear and Greed Index determines whether the market is bullish (high) or bearish (low) based on investor feelings toward the market (low). ‘Extreme dread’ indicates that investors are extremely concerned, but it could also indicate that now is a good time to buy. When the index shows that investors are becoming overconfident, it suggests that the market is due for a correction.
Volatility makes up a quarter of the index. The current Bitcoin volatility and greatest drawdowns are compared to the equivalent average values from the last 30 and 90 days. According to the alternative. I, an exceptional increase in volatility is an indication of a scared market.
Market volume, also known as momentum, accounts for 25% of the total weightage. The current volume and market momentum are monitored, and the 30- and 90-day averages are compared. The market is deemed greedy or excessively bullish if there are substantial daily buying volumes in a positive market.
The cryptocurrency mania is fueled in large part by social media posts. In the index, social media is given a 15% weight. This information is accurate. This data is estimated by tracking Twitter hashtags and focusing on the pace and amount of social media interactions, according to Alternative.
Dominance has 10 percent of the index’s weightage. A coin’s presence or share in the market cap of the entire crypto market is its dominance.
How Accurate Is This Index and Should you Trust it?
To some extent, the Fear and Greed Index aids in understanding the current state of the crypto market. However, the index alone cannot be used to make an investment, holding, or withdrawal decisions.
Kashif Raza, the founder of Beginning, an online platform dedicated to crypto knowledge, recommends paying attention to things like fundamental analysis and technical analysis.
While the index represents the current sentiment, it is not an accurate predictor of future market movements. For example, the index showed ‘Extreme Greed’ (>90) in November 2020, which typically means that investors should book profits.
However, Bitcoin and the crypto market continued to post newer highs over the next six months,” says Vikram Subburaj, co-founder and CEO, Giottus Cryptocurrency Exchange.
Subburaj advises investors to look at other technical metrics in conjunction with the Fear and Greed Index to understand how the market may behave in the near future.
On January 10, 2022, Crypto Fear and Greed Index is 23, which indicates ‘Extreme Fear’ according to the alternative.