Crypto Fear and greed index shows extreme fear is ruling the markets

The current cryptocurrency market sentiment is mired in “extreme fear” but that is not necessarily a bad thing. In fact, this situation is exactly the reason why investors are recommended to “buy dip”.

The “extreme fear” is being promoted as an opportunity to buy cryptocurrencies such as Bitcoin, Ethereum, Solana and others at such low prices that once the prices recover, investors can sell them for greater profits.

Fear &. greed index

source: https://alternative.me/crypto/fear-and-greed-index/The cryptocurrency market in general has been swimming in the red since the new year began with the first week pulling the biggest cryptocurrencies in double digits as fear, uncertainty and doubt (FUD) gripped the global economy amid concerns about inflation, liquidity, etc. The next step for the US Federal Reserve will be.

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Caption: None of the top 10 cryptocurrencies bailed out, in the market-wide drop on January 6, 2022. The image depicts a seven-day chart of the top 10 excluding stablecoins.

Source: CoinMarketCap

This is where the Fear and Greed Index (FIG) comes in. It helps one to take a step back, confirm if sentiment about the broader market is correct, and separate sentiment from data. The makers of this tool claim that it helps avoid overreaction.

Index Levels vs. Market Sentiment:

index level market sentiment
under 25 Extreme fear
26-49 afraid
50 neutral
51-74 Greed
75-100 extreme greed

Fear is not always a bad thing

A little bit of fear is good for avoiding investments that one might regret, but a generalized irrational fear across the market can sometimes mean the exact opposite – that is, lower prices can be an opportunity to buy crypto assets at a lower price than expected. Experienced traders who like to wait for their investment to return see this as an opportunity to ‘buy the dip’.

In general, factors causing fear in the crypto market include news FUDs, inexplicable drops in the price of crypto assets, and historical patterns that have failed to emerge like the “Santa Rally.” This time around, FUD grew out of the news of the omicron variant of COVID-19, and the steps being taken by governments to control it — such as potential shutdowns and requiring employees to work again as the pandemic worsens for what seems like the time.

Moreover, the ‘Santa Rally’ – referred to by the week-long rally in cryptocurrency prices from the end of the year to the beginning of the new year – has been seen over the past three years but not seen at the end of 2021.

Another factor known to cause fear in the cryptocurrency markets, and the resulting drop in cryptocurrency prices, is when ‘whales’ or major crypto-asset holders sell a portion of their holdings. In the stock market, when a “bear” or “bull” decides to sell their shares.

It is known that such transactions by whales trigger automated buy and sell orders on exchanges, which are prepared by smaller investors.

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Caption: From the beginning of 2017 onwards, every Christmas has seen a Santa Claus long rise that drives up the value of Bitcoin, with the exception of the short Christmas rally in 2021.

Source: CoinMarketCap

Greed doesn’t mean you should give in to the idea


While “extreme fear” sounds like an invitation to “buy the dip,” this may only apply to those who will hold digital assets for the long haul. Investors with shorter return prospects may want to step back and resist the fear of losing out (FOMO). On the other hand, the prevailing sentiment in the market is “greed” which could mean that prices are approaching their “all time high” values. At a time like this, those whose crypto wallets hit their target profits may choose to sell and realize those gains.

Looking at the notable uptick in 2021, money managers have been quoted as saying that the cryptocurrency markets are set to see a correction in 2022.

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Note: The FGI chart of sentiment toward Bitcoin is above. Tops closely track the actual price increases that Bitcoin experienced over the same time period.

Source: Alternative.me

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Bitcoin logarithmic graph, same time period as FGI, data from CMC

What is the Cryptographic Fear and Greed Index (FGI)?

Created by a pair of web developers in a small corner of the web, Crypto Fear and Greed Index (FGI) is a Bitcoin-focused tool that has become an important for crypto investors.

Its purpose is to indicate the current sentiment of the market, by reducing it to a number that represents the sentiment. By demonstrating the sentiment of other participants, it can be used by those who have the resources to bet against sentiment and make profits. With their own acceptance, an indicator showing one end of ‘fear’ could represent a buying opportunity, and the other end of ‘greedy’ could mean the market is about to correct.

FGI is said to take into account five factors to reach a conclusion, with the following weighting. In total, an index value of zero means extreme fear, and an index value of 100 signifies extreme greed.

FGI factors the weight
volatility 25%
market size 25%
Social media 15%
Polls (paused) 15%
dominance 10%
google trends 10%

  1. Volatility: Measures the current volatility of Bitcoin against the last 30 and 90 days.
  2. Market size: compares the current high to the average of the last 30 and 90 days.
  3. Social media: Analytics for likes, posts and hashtags from Twitter.
  4. Polls: Weekly surveys are used to gauge market direction and general sentiment, but are not currently in use. Dominance: measures the percentage share of bitcoin in the total market capitalization of cryptocurrencies.
  5. Google Trends: Tracks Google search trends, search volumes, and recommendations for Bitcoin related terms.

FGI is just one of many factors to consider before buying cryptocurrency

For a cryptocurrency investor, market sentiment is a useful indicator when deciding on the next course of action. Other resources that can help evaluate an investment include the Sharpe ratio, and risk balancing through asset diversification. For additional guidance, be sure to consider market updates and do your own research (DYOR) about cryptocurrency before deciding to invest in it.

Disclaimer: This is a sponsored post in partnership with WazirX.

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