The cryptocurrency greed and panic index can observe the investment sentiment of the market and is an important reference indicator for the macro analysis of the currency circle. This article analyzes in detail the composition of the greed and panic index, the method of use and the limitations of its application.
Investors Can Use Crypto’s Greed-Fear Index to Determine When to Buy Assets
The Crypto Greed and Fear Index is a leading cryptocurrency sentiment index created by investment analysis site Alternative.me. The index is designed to measure general market sentiment towards cryptoassets. The index began measuring investor sentiment on February 1, 2018.
Image source: alternative.me
The cryptocurrency greed and fear index is measured on a scale of 0-100, with lower scores representing more fear and higher scores representing more greed. A score of 0-24 represents “extreme fear,” meaning investors are selling heavily and exiting the market. A score of 25-49 represents “fear,” meaning that a significant number of investors are selling while market interest remains low. A score of 50-74 represents “greed,” which means a lot of buying is taking place, causing prices to rise. A score of 75-100 represents “extreme greed”, indicating that the market is very hot and the market “bubble” may burst soon.
Image source: alternative.me
As of early May 2022, the index has reached the resistance level of “10”, or “extreme fear”. As mentioned earlier, “extreme fear” usually means that prices have fallen sharply and investors are exiting the crypto market, while “extreme greed” is usually associated with price surges and new investors entering the market.
Previous moments of “extreme fear” occurred most recently in January 2022, May, June 2021 and July 2021, March 2020 and August 2019, when the index hit an all-time low of 5. The most recent “extreme greed” moments occurred in October and November 2021, January, August, November, December, January 2020, August 2020 and June 2019.
The Crypto Greed and Fear Index can be a valuable tool for long-term and short-term crypto investors. During times of panic, investors may want to build their positions in crypto assets at a lower cost, while others are afraid to enter the market. Likewise, in times of greed, investors may want to hold off on buying new crypto assets or even sell some cryptocurrencies while prices are still high. However, it should be noted that the index focuses primarily on Bitcoin and less on other cryptoassets, which may make it less accurate and useful than expected.
How to Calculate the Crypto Greed Fear Index?
Image source: alternative.me
Chart of Bitcoin Dominance, representing one of several weighting factors used to calculate the Crypto Greed Fear Index.
Alternative.me’s Crypto Greed Fear Index is calculated using six main factors, each weighted by perceived importance. These factors include:
1. Market Momentum and Trading Volume (25%): Current trading volume and market momentum are some of the most important factors considered by the Crypto Greed and Fear Index. The index is calculated by comparing current daily volume and momentum to 30-day and 90-day averages. Greater sales volume and daily negative market moves indicate significant selling pressure, thus increasing panic. By contrast, large buying volumes and repeated positive market moves suggest heightened greed.
2. Volatility (25%): Volatility is another important factor. The higher the volatility of a cryptoasset, the more fearful investors may be, resulting in a lower score for the index. As with market momentum and volume, volatility and value declines (maximum drawdowns) are compared to 30-day and 90-day averages.
3. Trend (10%): The Crypto Greedy Fear Index also measures the search volume for cryptocurrencies on Google, with higher search volumes generally leading to greater underlying greed, hence a higher index score. Like other indicator factors, this search volume study focuses on Bitcoin and weights search terms based on perceived importance and volume. However, not all searches are weighted the same (not all searches have a positive impact on the index score), and negative searches such as “Bitcoin market manipulation” and “Bitcoin crash” indicate greater fear in the market.
4. Dominance (10%): Dominance looks at Bitcoin’s market cap as a percentage of all cryptocurrencies’ market cap. It is generally believed that Bitcoin’s increased dominance (increased market share) represents a more dire market, as investors may see Bitcoin as a cryptocurrency “safe haven”. In contrast, the index sees increased altcoin investment as a more greedy market, with more speculators willing to invest in lesser-known assets in the hopes of stellar returns. However, this approach may not be a particularly prominent factor in the current market, as Bitcoin’s current market share in early May 2022 (41.66% at around $31,500) is currently lower than Bitcoin’s in November 2021 At the height of $69,000, the market share was around 43%. This suggests that investors are not actually flocking to Bitcoin as a “safe haven” during times of market fear. This could be attributed to the growth of ETH as well as stablecoins like Tether (USDT) and the strength of other altcoins like Binance Coin (BNB). So a possibly better measure of dominance might consider the dominance of the top 3-4 assets (or even the top 10 assets) rather than just Bitcoin and compare the market cap of these combined assets to the rest of the market .
5. Survey (15%): Although this part of the calculation has been suspended, until recently Alternative.me used its sister site Strawpoll.com to conduct a weekly crypto poll, which will be used as part of the index calculation. While the polls are still being conducted, they are not currently used as part of the index calculation.
6. Social Media (15%): The Crypto Greed and Fear Index utilizes text processing algorithms to parse crypto-related market keywords on Bitcoin and Twitter. The algorithm collects and counts posts with crypto-related hashtags, and measures how quickly crypto-related posts are published and how much engagement the posts have over a specific time period. Higher interaction rates generally respond to more market greed, while lower interaction rates may indicate more dire market behavior. As with the other index measurements on this list, the focus and weight of social media behavior is more focused on Bitcoin than other cryptocurrencies. The index’s creators are currently trying to add Reddit sentiment analysis using a similar text-processing algorithm, which could be added to the index’s social media calculations in the coming weeks and months.
Limitations on the use of the cryptocurrency greed and panic index
As useful as the Greed Fear Index is, it doesn’t tell investors anything about market timing, nor does it claim to make any valid predictions about the future. So even if the market is extremely greedy, it is still possible for the price to rise further and stay there. Likewise, even if the market is in extreme panic, prices could fall further and remain subdued for an unknown period of time.
Additionally, the Crypto Greed Fear Index doesn’t pay much attention to ETH, the second-largest asset in the crypto space. The ETH/BTC ratio can be another important indicator of market movements that may be of interest to investors. Arguably the ETH/BTC ratio is just another measure of Bitcoin’s market dominance, but since ETH has a large market cap, it can be useful to include it in the calculation. The index also does not focus on any particularly high-growth sectors in the crypto market, such as stablecoins and their related governance tokens, or the relative market capitalization or profits generated by various DeFi protocols.
It should also be noted that the index also does not take into account the Bitcoin halving. This is generally a bullish factor due to reduced additional supply (meaning lower Bitcoin inflation). However, the Bitcoin halving could become more bearish as more traders expect Bitcoin to rise temporarily (and fall later), meaning that the information has already been incorporated into the market and therefore less impactful.
Overall, the Crypto Greed Fear Index is just one tool investors should consider using when deciding when to buy cryptocurrencies, along with various fundamental analysis indicators. Historically, one method that some long-term investors prefer to buy cryptocurrencies is dollar cost averaging (DCA), buying equal or near-equal amounts of cryptocurrencies over a long period of time at pre-defined intervals (e.g. once a month), Whether the market is greedy or fearful. In this way, investors buy at low and high prices, which usually makes them pay mid-price (not too cheap, not too expensive).
For day traders and swing traders, the Greed Fear Index also has some uses, although it can only be used with various other technical analysis tools and indicators. For example, day traders may be more useful to take small short positions when the market is panicking and daily declines are common, and long daily positions when the market is greedy.
Regardless of the strategy, investing in cryptocurrencies is always risky, and investors and traders should always be prepared to lose whatever they put in.
Crypto Greed Fear Index iOS App and API
In addition to the online index, Alternative.me offers investors some other tools. iPhone or iPad users can download the Fear and Greed Index widget, which will display current index data on the phone or tablet’s home screen. To use the widget, users need to first install the free Scriptable application from scriptable.app. Users can use the widgets API for commercial purposes as long as they place appropriate trust in Alternative.me.
Other Interesting Bitcoin and Cryptocurrency Charts and Indices
In addition to the Crypto Fear and Greed Index and traditional price charts, there are various other indices that crypto investors and traders may be interested in looking at. Some of the most interesting include:
DeFi Pulse Index: Created by DeFi information aggregator DeFi Pulse, the DeFi Pulse Index is a market capitalization-weighted index that tracks the performance of DeFi assets across the market.
Bitcoin Profitable Days Chart: This chart shows profitable days versus unprofitable days for holding Bitcoin.
Bitcoin Stock-to-Flow Model: This chart measures the number of bitcoins in circulation compared to the number of bitcoins mined (per year), and compares this ratio to the price of bitcoin.
CoinDesk Large Cap Index: The CoinDesk Large Cap Index (DLCX) tracks a basket of large-cap cryptocurrencies through a market capitalization-weighted index, covering at least 70% of the digital asset’s market capitalization.
The CoinDesk Smart Contract Platform Select Ex ETH Index: No (SCPXX) tracks the market cap-weighted performance of the largest and most liquid Eterheum-compatible smart contract platforms (primarily Layer 2).
In addition to the above indices and charts provided by Lookintobitcoin.com, CoinMarketCap and CoinDesk, The Block also provides a variety of more granular charts. The charts compare the performance of Bitcoin to various other assets, including DeFi assets, compare the market capitalization of Bitcoin and ETH to the market capitalization of various traditional companies, and compare the relative performance of non-Bitcoin L1. The Block also provides a variety of other useful crypto and DeFi charts, including a TVL (Total Value Locked) chart for blockchains, transaction volume charts for EVM-compliant and non-EVM-compliant Layer-1s, and even measuring theft of Defi development Graph of the amount of money.
Conclusion: The Crypto Greed Fear Index is a Powerful Indicator, but Has Major Limitations
The Crypto Fear and Greed Index is an excellent benchmark for crypto traders, investors and market analysts. However, it also has its limitations, such as its focus on Bitcoin to the detriment of other crypto assets, including ETH and stablecoins.
The index is also not entirely transparent in how it tracks and calculates data, especially when it comes to social media and trend analysis, nor does it provide an exact formula for calculating market momentum and volume or volatility. So this information is very helpful for those trying to use the index for practical purposes.
So, as mentioned, the index, while useful, should be just one of many data points used to track the cryptocurrency market and should not be heavily relied upon to make investment or trading decisions.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/do-you-really-understand-the-crypto-panic-and-greed-index/
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