Bitcoin Fear and Greed Index: What It Is & Why It Matters

Written by Sean GraytokUpdated: 7th Dec 2021
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This article will explain how the Bitcoin Fear & Greed Index works and how you can use it to navigate uncertain times in the Bitcoin market.

What is the Bitcoin Fear & Greed Index?

The Bitcoin Fear & Greed Index attempts to capture the Bitcoin market’s level of fear or greed in a single number between 0 and 100.

It is a multifactorial market sentiment analysis that considers volatility, market momentum and volume, social media sentiment, market dominance, and Google Trends data.

A value of 0 represents “Extreme Fear,” while a value of 100 means “Extreme Greed.”

Latest Crypto Fear & Greed Index

Historically, periods of “Extreme Fear” have represented excellent buying opportunities, and periods of “Extreme Greed” have suggested an overheated market that’s due for a correction.

Quantifying market sentiment can help people minimize their emotional trading decisions.

This index allows traders to establish clear lines in the sand. For example, “I buy bitcoin when the Bitcoin Fear & Greed Index drops below 20” or “I sell some Bitcoin (or at least sit tight) when the index is over 90.”

Analyzing The Bitcoin Fear & Greed Index

Let’s look at the history of the Bitcoin Fear & Greed Index since it was created in February 2018:

What Is the Bitcoin Fear and Greed Index?

The vertical axis goes from 0 to 100. Low values represent fear, and high values represent greed.

Next, let’s see the index’s reading during various periods of uncertainty and euphoria:

Bitcoin Fear and Greed

The periods of Extreme Fear have been great times to buy bitcoin, but that’s easier said than done.

Understanding the Bitcoin Fear & Greed Index

Output is only as good as its input, so let’s analyze the five data sources that generate the Bitcoin Fear & Greed Index.

Volatility

Bitcoin’s current volatility and maximum drawdowns are compared to the corresponding averages of those values over the last 30 and 90 days.

A spike in volatility, relative to the previous 30 and 90-day levels of volatility, may indicate the market is fearful.

Volatility accounts for 25% of the index.

>> Related: Why Is Bitcoin Volatile?

Market Momentum & Volume

Bitcoin’s current volume and momentum are compared to the corresponding averages of those values over the last 30 and 90 days.

The folks that generate the index assume that the market is greedy when there are high buying volumes in a positive market relative to the historic 30/90 day averages.

FOMO sets in as price rips, and new market participants euphorically buy so they don’t miss out on the rally.

The Fear & Greed Index captures this greedy behavior and increases the value closer to 100, suggesting a higher probability of a market correction.

Market momentum and volume accounts for 25% of the index.

Social Media

The index scrapes Twitter for sentiment by gathering and counting various Bitcoin-related hashtags over a certain time frame.

An unusually high interaction rate indicates a grown public interest in Bitcoin and may correspond to greedy market behavior.

The social media analysis provides a degree of qualitative analysis to the index and accounts for 15% of the output.

Market Dominance

The market dominance variable compares Bitcoin’s market cap to the total crypto market cap.

A rise in Bitcoin’s dominance suggests a more fearful market, and a decrease in Bitcoin’s dominance suggests a more greedy market.

Bitcoin is considered to be a safe haven crypto asset. It’s volatile relative to most traditional assets but boring relative to most alt-coins you’ll come across in DeFi.

So, when Bitcoin rips and everything is sunshine and rainbows, people go further and further out on the risk curve and buy alt-coins in an attempt to outperform Bitcoin.

The buying of alt-coins like Ether, Solana, Polkadot, and Dogecoin increases the crypto total market cap relative to the Bitcoin market cap, thus lowering Bitcoin’s market dominance.

This is an example of an overall greedy crypto market and suggests the market (including Bitcoin) may be due for a correction.

Market dominance accounts for 10% of the index.

The index also pulls various Bitcoin-related Google search queries to identify changes in search volumes.

This factor is similar to social media sentiment and captures fear and greed more qualitatively.

People turn to Google for answers, which is why search data serves as a leading indicator for countless outcomes.

Trends input accounts for 10% of the Bitcoin Fear & Greed Index.

Bitcoin Fear and Greed Index: Frequently Asked Questions

What is Bitcoin fear and greed?

The Bitcoin Fear & Greed Index measures the level of fear and greed in the Bitcoin market at any given time. It takes several factors, such as volatility and Twitter sentiment, and generates a value between 0 and 100, where 0 represents Extreme Fear and 100 means Extreme Greed.

Can Bitcoin crash again?

Bitcoin is a volatile asset that will definitely crash again. Bitcoin’s significant corrections are a byproduct of it trading in a completely free and unmanipulated market where leverage is abundant. It is a small asset that is monetizing in real-time, making it vulnerable to large swings in price.

Bottom Line: Bitcoin Fear and Greed Index

The Bitcoin Fear & Greed Index is a valuable tool to keep close during Bitcoin booms and busts.

We recommend using it in conjunction with other on-chain metrics like the MVRV ratio, SOPR ratio, and various Supply Shock ratios to navigate the ever-changing Bitcoin market.

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This article is for informational purposes only, and it is not intended to be investment advice.

Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and is a recognized expert in investing, financial management, and Bitcoin. His work has been cited in leading industry publications, such as InvestorPlace and Business Insider. Sean is interested in the people and companies who are driving technological innovation.