Although this metric can help illustrate overall sentiment in the crypto markets, it should be taken with a rather liberal pinch of salt.
There’s a fair argument to be made that a Crypto Fear & Greed Index could be renamed the How Not to Follow the Dumb Money Index.
That’s probably not entirely fair. But then, Warren Buffett’s line about fear and greed in the broader financial markets is: “Be fearful when others are greedy and greedy when others are fearful.”
So, it’s certainly not entirely unfair.
What is the Fear and Greed Index?
According to Investopedia, the fear and greed index was developed by CNNMoney to measure two of the primary emotions that drive investors in the market and influence how much they are willing to pay for stocks. The index is measured in a daily, weekly, monthly and yearly timeframe, and can be used to estimate if the stock market is fairly priced.
This is based on the logic that extreme fear would depress stock prices below their fair value, while extreme greed would do the exact opposite. The CNN fear and greed index measures 7 indicators, namely: junk bond demand, market momentum, market volatility, put and call options, safe haven demand, stock price breadth and stock price strength.
What is the Crypto – or Bitcoin – Fear and Greed Index?
The creator of the first Crypto Fear & Greed Index, Alternative.me, describes it this way: “With our Fear and Greed Index, we try to save you from your own emotional overreactions.”
The index analyzes and measures emotions and sentiments for Bitcoin and other large-cap cryptocurrencies from various sources. At the time of this writing, the crypto fear and greed index is displaying greed, with a score of 71.
Alternative.me goes on to explain that its conclusions are based on two simple assumptions: “People tend to get greedy when the market is rising which results in FOMO (fear of missing out). Also, people often sell their coins in irrational reaction of seeing red numbers.”
Which is to say, many investors — those not-smart ones — tend to buy high and sell low.
Warren Buffett advocates the reverse strategy.
How the Crypto Fear and Greed Scale Works
The Crypto Fear & Greed Index runs from 0 to 100. A lower score means there is more fear in the market, while a higher one indicates that greed is starting to run rampant.
Extreme Fear is defined as a score between 0 and 24, but this is downgraded to Fear between 25 and 49. As you'd expect, 50 is roughly neutral. Anywhere between 51 and 74 indicates there's Greed in the market, escalating to Extreme Greed with a score over 75.
When the index measures Extreme Fear, many market participants are selling, driving down prices, which can make a good buying opportunity — buying the dip.
When it measures Extreme Greed, FOMO can make for a prime opportunity to take profits by selling at the top of the market.
That said, it’s worth being cautious about using the Index to time the market — something many smart investors warn against.
The Crypto Fear & Greed Index is based (loosely) on CNNMoney’s stock market Fear & Greed Index, and there are lessons to be learned about the potential pitfalls of profit taking versus the value of buy and hold.
Fidelity looked at a $10,000 investment in the S&P 500 over a nearly four-decade period from 1980 to August 2020. Missing just the 10 best days cut more than half off of the return of that investment.
What Does the Crypto Fear and Greed Index Measure?
Let’s back up and focus on what is actually measured by the Crypto Fear & Greed Index.
First of all, it should be noted that despite its name, the Crypto Fear & Greed Index only measures Bitcoin, not the market as a whole (although it says it plans to add indexes for large altcoins “soon.”) That said, Bitcoin does tend to track both the price and sentiment of the broader crypto market, so it has relevance even if you’re not investing in BTC.
There are five components of the Crypto Fear & Greed Index, according to Alternative.me.
- Volatility accounts for 25% of the index. It measures the current price of Bitcoin and compares it with 30 and 90-day averages. The Index uses this as a surrogate for fear in the market.
- Market Momentum/Volume is the other biggie, also accounting for 25% of the index. This takes Bitcoin’s current trading volume and momentum, comparing it with 30- and 90-day averages and then combining the results. This is taken as a stand-in for too much bullishness or greed in the market.
- Social Media takes up 15% of the index. This currently looks at Bitcoin-focused Twitter hashtags, focusing on the speed and number of interactions. A higher-than-normal interaction rate is taken to mean greedy market behavior. The company is working on adding Reddit to this as well.
- Dominance gets 10%, looking at Bitcoin’s share of the overall crypto market capacity. Growing dominance means funds are being pulled from more risky altcoins, on the assumption that Bitcoin is seen as “the safe haven of crypto.” A decrease in BTC dominance suggests growing greed as represented by investments in riskier coins.
- Trends also account for 10%, based on crunching Google Trend data for various Bitcoin-related searches.
You’ll notice that adds up to 85%. The Crypto Fear & Greed Index initially used surveys for the remainder, but those are paused — and have been for quite some time. It’s not entirely clear how the other percentages are affected.
A Grain of Salt
While the Crypto Fear & Greed Index is definitely a useful tool for getting a grasp on market sentiment, it can be easy to read too much into it by itself.
Notably, the volatility of Bitcoin can lead to very sharp but very brief changes in the Index.
Take the last week of February 2021. Bitcoin dropped nearly $12,000, from $57,500 to about $45,100 that week, before climbing past $60,000 over the next two weeks. That’s severe, but the Crypto Fear & Greed Index dropped from 94 — the top end of Extreme Greed — on February 22 all the way to 38 on March 1.
And the Crypto Fear & Greed Index was at 73 on Apr. 20 and again on May 9, with a drop to 27 on Apr. 26. It wasn’t until May 12 that the plummet into fear really marked the beginning of the spring 2021 crash, when Bitcoin lost 50% and stayed there for months.
Which is another way of saying, remember to DYOR — do your own research — and that while herds of lemmings do not regularly follow each other off a cliff, human investors do.
This article contains links to third-party websites or other content for information purposes only (“Third-Party Sites”). The Third-Party Sites are not under the control of CoinMarketCap, and CoinMarketCap is not responsible for the content of any Third-Party Site, including without limitation any link contained in a Third-Party Site, or any changes or updates to a Third-Party Site. CoinMarketCap is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement, approval or recommendation by CoinMarketCap of the site or any association with its operators. This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice. The views and opinions expressed in this article are the author’s [company’s] own and do not necessarily reflect those of CoinMarketCap. CoinMarketCap is not responsible for the success or authenticity of any project, we aim to act as a neutral informational resource for end-users.
