Fear and greed index turns to greed as bitcoin hits two month high
Although this metric can help illustrate overall sentiment in the crypto lớn markets, it should be taken with a rather liberal pinch of salternative text.
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There’s a fair argument khổng lồ be made that the Crypto lớn Fear và Greed Index could be renamed the How Not to lớn Follow the Dumb Money Index.
That’s probably not entirely fair. But then, Warren Buffett’s line about fear và greed in the broader financial markets is: “Be fearful when others are greedy và greedy when others are fearful.”
So, it’s certainly not entirely unfair.
The creator of the Crypto Fear và Greed Index, Alternative sầu.me, describes it this way: “With our Fear & Greed Index, we try lớn save you from your own emotional overreactions.”
Alternative.me goes on khổng lồ explain that its conclusions are based on two simple assumptions: “People tend lớn 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 lớn say, many investors — those not-smart ones — tend to lớn buy high và sell low.
Warren Buffett advocates the reverse strategy.
How the Crypto Fear và Greed Scale Works
The Cryplớn Fear và 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 lớn run rampant.
Extreme Fear is defined as a score between 0 và 24, but this is downgraded khổng lồ Fear between 25 and 49. As you'd expect, 50 is roughly neutral. Anywhere between 51 & 74 indicates there's Greed in the market, escalating khổng lồ 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 lớn Fear & Greed Index is based (loosely) on CNNMoney’s stoông xã market Fear và Greed Index, và there are lessons lớn 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 khổng lồ August 20đôi mươi. Missing just the 10 best days cut more than half off of the return of that investment.
What Does the Cryplớn Fear và Greed Index Measure?
Let’s back up & focus on what is actually measured by the Crypto lớn Fear & Greed Index.
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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 lớn add indexes for large altcoins “soon.”) That said, Bitcoin does tover to traông xã both the price and sentiment of the broader crypto lớn market, so it has relevance even if you’re not investing in BTC.
There are five sầu components of the Cryplớn Fear & Greed Index, according khổng lồ Alternative.me.
Market Momentum/Volume is the other biggie, also accounting for 25% of the index. This takes Bitcoin’s current trading volume và momentum, comparing it with 30- & 90-day averages và 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 tốc độ và number of interactions. A higher-than-normal interaction rate is taken to mean greedy market behavior. The company is working on adding Reddit lớn this as well. Trends also tài khoản for 10%, based on crunching Google Trend data for various Bitcoin-related searches.You’ll notice that adds up to lớn 85%. The Crypto lớn Fear & Greed Index initially used surveys for the remainder, but those are paused — & have sầu been for quite some time. It’s not entirely clear how the other percentages are affected.
A Grain of Salt
While the Crypto Fear và Greed Index is definitely a useful tool for getting a grasp on market sentiment, it can be easy to lớn read too much into it by itself.
Notably, the volatility of Bitcoin can lead lớn very sharp but very brief changes in the Index.
Take the last week of February 2021. Bitcoin dropped nearly $12,000, from $57,500 khổng lồ about $45,100 that week, before climbing past $60,000 over the next two weeks. That’s severe, but the Crypkhổng lồ Fear & Greed Index dropped from 94 — the top over of Extreme Greed — on February 22 all the way to 38 on March 1.
And the Crypto lớn Fear và Greed Index was at 73 on Aquảng bá. trăng tròn & again on May 9, with a drop lớn 27 on Apr. 26. It wasn’t until May 12 that the plummet inkhổng lồ fear really marked the beginning of the spring 2021 crash, when Bitcoin lost 1/2 and stayed there for months.
Which is another way of saying, rethành viên to DYOR — bởi vì your own research — and that while herds of lemmings vì not regularly follow each other off a cliff, human investors vị.
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