Bitcon Fear and Greed Index: Does It Actually Work?
in Bitcoin (BTC)
What if there was a way to perfectly time the Bitcoin (BTC) market?
Although investors use a variety of indicators and other forms of analyses to try and time BTC’s price fluctuations, the Bitcoin fear and greed index, modeled after CNNMoney’s fear and greed index for stocks, has grown in popularity as a way to measure Bitcoin/crypto market sentiment.
In this article, we’ll go over the basic purpose of the Bitcoin fear and greed index, the data sources the index uses, and whether or not the index is useful for timing the market.
Bitcoin Fear and Greed Index: Basic Purpose
The fear and greed index is a basic way of measuring if the market is “overbought” or “oversold”.
If the market is overbought and potentially ready for a correction or sell-off, the index will show that the market is Greedy.
If the market is oversold and potentially presenting a buying opportunity, the index will show that the market is Fearful.
This index is popular in both the stock and crypto markets because in both markets, investors are emotional, which can show in asset prices.
The current value of the Crypto Fear and Greed Index. Image credit: Alternative.me
Bitcoin Fear and Greed Index: Data Sources
So what goes into the crypto fear and greed index?
Here’s what the index’s official page has to say:
We are gathering data from the five following sources. Each data point is valued the same as the day before in order to visualize a meaningful progress in sentiment change of the crypto market.
First of all, the current index is for bitcoin only (we offer separate indices for large alt coins soon), because a big part of it is the volatility of the coin price.
But let’s list all the different factors we’re including in the current index:
We’re measuring the current volatility and max drawdowns of bitcoin and comparing it with the corresponding average values of the last 30 days and 90 days. We argue that an unusual rise in volatility is a sign of a fearful market.
Market Momentum/Volume (25%)
Also, we’re measuring the current volume and market momentum (again in comparison with the last 30/90 day average values) and put those two values together. Generally, when we see high buying volumes in a positive market on a daily basis, we conclude that the market acts overly greedy / too bullish.
Social Media (15%)
While our reddit sentiment analysis is still not in the live index (we’re still experimenting some market-related key words in the text processing algorithm), our twitter analysis is running. There, we gather and count posts on various hashtags for each coin (publicly, we show only those for Bitcoin) and check how fast and how many interactions they receive in certain time frames). A unusual high interaction rate results in a grown public interest in the coin and in our eyes, corresponds to a greedy market behaviour.
Surveys (15%) currently paused
Together with strawpoll.com (disclaimer: we own this site, too), quite a large public polling platform, we’re conducting weekly crypto polls and ask people how they see the market. Usually, we’re seeing 2,000 - 3,000 votes on each poll, so we do get a picture of the sentiment of a group of crypto investors. We don’t give those results too much attention, but it was quite useful in the beginning of our studies. You can see some recent results here.
The dominance of a coin resembles the market cap share of the whole crypto market. Especially for Bitcoin, we think that a rise in Bitcoin dominance is caused by a fear of (and thus a reduction of) too speculative alt-coin investments, since Bitcoin is becoming more and more the safe haven of crypto. On the other side, when Bitcoin dominance shrinks, people are getting more greedy by investing in more risky alt-coins, dreaming of their chance in next big bull run. Anyhow, analyzing the dominance for a coin other than Bitcoin, you could argue the other way round, since more interest in an alt-coin may conclude a bullish/greedy behaviour for that specific coin.
We pull Google Trends data for various Bitcoin related search queries and crunch those numbers, especially the change of search volumes as well as recommended other currently popular searches. For example, if you check Google Trends for "Bitcoin", you can’t get much information from the search volume. But currently, you can see that there is currently a +1,550% rise of the query "bitcoin price manipulation" in the box of related search queries (as of 05/29/2018). This is clearly a sign of fear in the market, and we use that for our index.
So Does It Work? 3 Examples
So when all is said and done, does the fear and greed index actually work? Here are a few examples.
Extreme Greed: June 26th, 2019
On June 26th, 2019, the fear and greed index for Bitcoin gave a value of 95 (from 0-100), indicating Extreme Greed. At the time, the value of 95 was the highest ever value recorded by the index, which has data going back to February 2018.
Coincidentally, this actually presented a good selling opportunity, as June 26th saw Bitcoin hit its peak 2019 price of $13,000 per BTC. Then, it lost nearly half its value over the following 6 months, when it hit $6,640.52 per BTC on December 17th, 2019.
Extreme Fear: End of November to Middle of December, 2018
On the other end of the spectrum, from the end of November to the middle of December in 2018, the index consistently flashed Extreme Fear, as the value of the index bounced between 10-20.
Coincidentally, this presented a great buying opportunity, as Bitcoin bounced around $3,000 - $4,000, before rallying all the way to $13,000 per BTC in June 2019, as mentioned above.
Extreme Fear: Mid-August to Mid-September, 2018
From the middle of August to the middle of September in 2018, the index flashed Extreme Fear, bouncing between 15-25.
While this range of 15-25 wasn’t as bad as the range seen towards the end of 2018 (10-20) in the example above, it was still one of the consistently lowest (fearful) ranges the index produced from February 2018 to May 2020.
While the Bitcoin price did reach nearly $7,400 during this period between mid-August to mid-September 2018, that price spike was brief. For the most part, the Bitcoin price hovered around $6,500, before dropping significantly in mid-November 2018.
This of course led to a period of even greater fear, as mentioned earlier in the End of November to Middle of December, 2018 example.
Therefore, while the index did show consistent Extreme Fear from mid-August to mid-September 2018, that might not have been the best buying opportunity since prices moved even lower.
For investors struggling to understand the emerging Bitcoin and broader crypto market, there definitely aren’t as many analysis tools available as there are in traditional markets.
However, the Bitcoin fear and greed index can provide some clues as seen in the examples above. While it isn’t perfect, it can definitely help you navigate the volatile Bitcoin market in combination with other tools.
Regardless of what you end up doing, be sure to use a reliable and secure Bitcoin wallet that protects your valuable BTC! Unless you are actively trading, it’s a good idea to keep your BTC off centralized exchanges, which are known for losing user funds. Besides, wallets like Exodus let you trade BTC for other cryptos right from your wallet!
While there are various wallet options available, you might like Exodus if you value the following features:
- Support for over 100 crypto assets
- Focus on premium design and ease of use
- Being the only wallet to support desktop, mobile, and hardware wallet (Trezor) integration
- Allowing you to exchange your Bitcoin for other cryptos right from your wallet - without creating an account!
- Giving you the ability to sync your wallet between desktop and mobile
- Having 24/7, fast human support if you ever need help
Stay safe and don’t get too greedy (or fearful) out there! 😎
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.