What is Fear and Greed Index
Why measure fear and greed?
The behavior of the cryptocurrency market is very emotional. People tend to get greedy when the market goes up, which leads to FOMO (fear of missing out). In addition, people often sell their coins in an irrational reaction to red numbers. With the Fear and Greed Index, we are trying to save you from your own emotional reactions. There are two simple assumptions:
- Extreme fear could be a sign that investors are too worried. This could be a buying opportunity.
- When investors get too greedy, it means the market is in for a correction.
How do you understand the Fear and Greed Index?
- 0-20 Extreme fear
- 21-40 Fear
- 41-59 Neutral
- 60-79 Greed
- 80-100 Extreme greed
The data are taken from two independent sources:
- Data on past BTC prices is downloaded from CryptoCompare.com service at the moment of page opening/updating, using Rest API technology.
- The data on the past values of the Fear and Greed Index are downloaded from the official site of the developers of this index Alternative.Me, at the moment of opening/updating the page, using the Rest API technology.
Data on the value of the Alternative.Me index is updated only once a day. BTC price data is updated by CryptoCompare.com service with a delay of several seconds. Indicator web page on our site is static and data is not updated after page loading. To update the data you need to refresh the page in your browser (F5).
Alternative.Me collects data from five different sources. Each data source is compared to the previous day’s value to visualize meaningful progress in cryptocurrency market sentiment. First of all, the current index is only for the Bitcoin (BTC) cryptocurrency. Listed below are all the factors that Alternative.Me includes in calculating its Greed and Fear Index:
Volatility (25 %)
Alternative.Me measures current volatility and maximum BTC drawdowns, then compares them to their respective averages over the past 30 days and 90 days. They argue that the unusual increase in volatility is a sign of fear in the market.
Market Momentum/Volume (25%)
Alternative.Me also measures current volume and market momentum (also compared to averages over the past 30 days and 90 days) and adds the two together. Typically, when there is high buying volume in a positive market on a daily basis, they conclude that the market is acting too greedy – too bullish.
Social Media (15%)
Sentiment analysis on Reddit.com is still not included in the index, but may be in the future. The analysis on Twitter.com is already working. There they collect and count posts by various hashtags for each coin, but only those related to BTC are publicly displayed. They then check how fast and how many interactions they get in certain time slots. The unusually high rate of interactions leads to an increase in public interest in the coin and, in their opinion, is consistent with greedy market behavior.
Together with Strawpoll.com, a rather large public polling platform, Alternative.Me conducts weekly polls asking people what they think about the cryptocurrency market right now. There are usually 2,000-3,000 people in each survey, which is how Alternative.Me gets an idea of the sentiment of cryptocurrency investors. Alternative.Me doesn’t pay too much attention to these results.
BTC’s dominance resembles the market capitalization share of the entire cryptocurrency market. Alternative.Me believes that BTC’s rise in dominance is caused by fears (and therefore a decline) of too risky investments in alternative cryptocurrencies, as BTC becomes more and more of a “safe haven. On the other hand, as BTC’s dominance diminishes, people become more greedy, investing in riskier cryptocurrencies, dreaming of their chance in the next big bull run. In any case, when analyzing the dominance of coins other than BTC, the opposite can be argued, as more interest in alternative cryptocurrencies may indicate a bullish (greedy) behavior of that particular cryptocurrency.
Alternative.Me uses data from Google.Trends for various search queries related to BTC and analyzes the resulting numbers. Especially the change in search traffic volumes, as well as other currently popular search queries. For example, if you check Google.Trends for the query “Bitcoin,” not much information can be gleaned from the search volume. But currently we can see that there is a +1550% increase in “bitcoin price manipulation” in the block of related search queries. Alternative.Me thinks this is a sign of fear in the market, and they use it to calculate their index.
Differences from the original
Our version of the Fear and Greed Index has useful differences from the original:
- Extreme fear is a value of 20 inclusive or below (in the original 25)
- Extreme greed is defined of 80 inclusive or higher (in the original 75)
- Neutral zone 40 to 60 (in the original 45 to 55)
- In our version of the index, all five sectors of values are equal and account for 20% of the total
- Therefore, “extreme greed” and “extreme fear” signals are more rare, but also more accurate