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What is Crypto Fear and Greed Index; how can it help investors?

The index, which tracks the overall market sentiment, ranges from 1-100, where 1 represents extreme fear and 100 represents extreme greed.

December 31, 2021 / 01:55 PM IST
(Image: Reuters)

(Image: Reuters)

As we approach the cusp of 2022, there is no denying that if there is something that aptly captured the zeitgeist and imagination of the financial world this year, it is cryptocurrency. 

The popularity of digital currencies has exponentially surged this year, to the extent that the word ‘crypto’ was used on Reddit almost 6.6 million times across the site during 2021, along with being the most viewed topic of the year.

But intrinsic to the world of cryptocurrencies, along with this popularity, is also the high volatility and uncertainties of these digital currencies. Driven majorly by investor sentiments, which in turn are propelled by often short-lived market trends and popular opinions, crypto-related decisions turn out to be a function of impulse, greed or fear rather than an objective assessment of the currency’s fundamentals. 

This is where the Crypto Fear and Greed Index comes in handy. Presently, the index stands at 28, which represents fear in the market. This can also help you gauge a good time for investing or divesting in the cryptocurrency space, by combining the prices of different cryptocurrencies, as well as their volumes and volatility. 

The index, which tracks the overall market sentiment, ranges from 1-100, where 1 represents extreme fear and 100 represents extreme greed. In other words, 1 represents panic, pessimism and fearfulness of the investors i.e. bearish attitude about the future prospects of cryptocurrencies, which could translate into a good buying opportunity. 

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At the same time, 100 indicates extreme optimism about the digital currencies, which subsequently give rise to the greed to amass more of them, meaning that the market might be due for a correction soon. 

The constituents of the Index

The Index gives 25 percent weightage to market volatility, operating under the assumption that an unusual rise in volatility means a fearful market. Market momentum or trading volume comes next, with 25 percent weightage. High trading volumes indicate that the market is perhaps, overly greedy. 

Social media, constituting 15 percent of the index, analyses the interaction, and hashtags each coin garners to determine what’s popular. Higher engagement with a particular currency is a sign of growing public interest, which subsequently means individuals growing bullish on the cryptocurrency. 

Added to that is data from Google trends with 10 percent weightage, which crawls through Google queries to see which currencies are investors most interested in. 

Lastly, with 10 percent weightage comes the parameter of the coin’s dominance. When Bitcoin dominance starts to rise, it is a sign that people are less interested, even fearful of the more risky, speculative alt-coin investments. Like currently, BTC’s dominance is at 40.37 percent, rising by 0.05 percent over the last 24 hours. 

But when the dominance of this market leader coin shrinks, people are possibly assuming more risk and greed by splurging into more chancy alt-coins.

The year started on a note of extreme high and greed, with the index ranking 94 on January 1, 2021. And as we step into the next year, the market is down with fear, at 28 points. So, here's to investing with a balance of fear and greed in the cryptocurrency space in the year to come!
Ira Puranik
first published: Dec 31, 2021 01:55 pm
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