Human emotions are at the heart of various processes in economics, politics, business, and ordinary life. Joy, fear, greed influence decision-making. This statement is true for cryptocurrency trading. A person decides to sell or buy assets based on historical data and market analysis. However, emotions play a big role. To assess their impact, a term is used – the index of fear and greed.
This term appeared a long time ago, was used to analyze the stock market, and allowed to determine the type of trend. Later, it began to be used in digital asset trading.
Fear acts in case of extreme collapses in the exchange rate. Investors lose their ability to think logically, strive to throw away the rapidly falling cryptocurrency, thereby strengthening the bearish trend. When a coin rises in price, traders start buying assets, greed is at work.
The fear and greed index are measured in units from 0 to 100. The higher the indicator, the more greed prevails in the emotions that drive traders in the market. However, over time, greed changes to fear. This happens under the influence of various factors – from the desire to make a profit faster to the negative news background.
The main factors that affect the indicator:
- News background in social networks, blogs.
- Asset dominance (position in the cryptocurrency rating).
- Other factors.
The higher the cryptocurrency capitalization, the more confidence it inspires among investors. For example, the volume of Bitcoin in the fall of 2021 is at the level of large companies. If the price falls, the capitalization will decrease. Traders will start to worry and sell coins, accelerating the transition to a bearish trend.
The volatility of cryptocurrency is one of the main factors that causes distrust of digital assets by some serious investors (Warren Buffett, for example). Sharp course changes make people nervous, they seek to get rid of such an asset. To calculate the index, volatility data for a month or quarter are considered. An increase in the volatility index affects the level of fear of traders.
The news background on social networks is a powerful factor that is a way to change the trend. Comments, reposts of messages of opinion leaders are especially important. For example, Elon Musk’s tweets kept positive, can understand the exchange rate of a coin. On the contrary, negative statements contribute to a fall in prices.
For the market analysis, surveys or studies are conducted. Research takes a lot of time and resources. The survey is much easier and faster to organize.
Bitcoin dominates among cryptocurrencies. The capitalization of BTC is 2 times more than that of Ethereum, the second-largest coin. Therefore, the rest of the cryptocurrencies are valued in relation to bitcoin. If the ratio of the capitalization level of BTC to altcoins falls, investors transfer assets to other coins and vice versa.
User interest is shaped by trends. Evaluating queries in search networks allows you to assess the desires of people. If interest grows, the greed factor in the aggregate index rises, the indicator tends to its maximum value.
The fear and greed indicator are not the main indicator among all analysis tools. At the same time, it does not quite accurately show the predicted price value. If fear prevails, then the rate will not necessarily fall. Various factors affect the value of a cryptocurrency, and it is difficult to predict the price.
The fear and greed indicator shows the current situation in the crypto market more. With its help, you can identify a change in trends, rate correction after a surge.
After a long rise or fall in price, the market reverses. The Fear and Greed Index shows the corresponding emotions of traders when the rate moves upward or downward. The rate is falling, and the indicator shows greed, then a correction of the price of the cryptocurrency is quite possible. If at the same time the indicator changes its value from greed to the direction of fear, then a fall in price may become a trend.
Bitcoin is the first cryptocurrency to be the most trusted by investors. Its price and level of capitalization are maximum. Naturally, the change in the value of bitcoin affects the exchange rate of other cryptocurrencies. Therefore, the bitcoin fear and greed index are more important, all traders are guided by it, regardless of the chosen instrument.
There are different services to view the sentiment index:
- Bybt and others.
For example, on December 12, 2021, the fear and greed index was 26 points, corresponding to the “Fear” sector (25-49). Below 25 is the “Maximum Fear” zone. When the market moves towards this sector, a reversal may soon occur. The market is cyclical, one phase replaces another. Analysts and traders need to identify the point of the reversal to make the right decisions. The main thing to remember is that the fear and greed index is not the main indicator for assessing the market situation, especially for long-term analysis.