The Crypto Fear and Greed Index [And How It Can Help You Make Decisions]

Humans are highly emotional creatures.

And since humans press the buy and sell buttons, financial markets are emotional systems as well.

So what if there was a model which captured the emotion of investors, so that others could use it against them?

The Crypto Fear and Greed Index does just that.

What Is the Crypto Fear and Greed Index? 

The Crypto Fear and Greed Index is a gauge that measures investor sentiment in the cryptocurrency markets. It represents the mood around bitcoin and other major cryptos.  

When times are good in crypto, investors tend to catch a case of ‘fear of missing out,’ or FOMO. During these times, it seems nothing can stop crypto prices from their bull run, causing investors to want their share and turning up the notch on greed. 

By the same token, when the market sours, and most any headline is interpreted in a negative way, crypto prices can’t seem to get out of their own way. Investors run for the exits, fear spreads, and the rest is history.

There are five stages to this emotional barometer, with extreme fear and extreme greed serving as the bookends. The stages along with their index scores ranging from 0 to 100 include: 

• Extreme Fear — Between 0-24
• Fear — Between 25-49
• Neutral - 50-ish 
• Greed — Between 50-74 
• Extreme Greed — Between 75-100 

What stage of #bitcoin are you in? pic.twitter.com/YkeOLeFfMk

— 402 Payment Required (@402PaymentReq) January 18, 2023

While it might not be an exact science, the index uses a number of variables to determine the outcome. These data sources and their weightings in the index include: 

• Market Volatility - 25%
• Market Momentum/Volume - 25%
• Social Media - 15%
• Surveys - 15% (not currently being factored into the index) 
• Dominance - 10%
• Trends - 10%

Crypto Fear and Greed Index Example 

To see the Crypto Fear and Greed Index in action, let’s take the crypto winter of 2022 and subsequent recovery in 2023. In June 2022, when the bitcoin price dipped below the $20,000 level, it took the Crypto Fear and Greed Index down with it. The index dropped to the “extreme fear” level, hovering between a reading of 20 and 30. There it stayed for more than six months. 

It wasn’t until January 2023 that the Bitcoin price began to show evidence of a bull run, rising from the $16,000 range to over $23,400 as of late January. The fear and greed index responded, climbing its way to “neutral” ground and a reading in the 50-ish range amid signs of a light at the end of the tunnel. 

How the Crypto Fear and Greed Index Can Help You Make Decisions 

You may be wondering how you can use the Crypto Fear and Greed Index to your advantage when making investment decisions. It takes a steady hand and a dose of patience, but it can be done. The good news is that the fear and greed index is updated daily, so there’s not much of a lag effect to worry about. 

By using the index to guide you, you can avoid the trap of buying when prices are high and then having to endure a market downturn. Even though you won’t invest with the masses, the trend is your friend here because it can help you to identify the overarching mood of the market. 

From there you can react. If you’re trying to score a quick profit, the index is probably not going to help you here

When investors are in full greed mode, this is probably not the best time to buy. When the index is flashing greed, it is a sign that prices might be near their highs of the current cycle and there could be trouble up ahead. A crypto market correction could be on the horizon, so be prepared. 

If you’re a long-term investor, this shouldn’t worry you too much. But your aim should still be to buy low and sell high (not easy to do), if and when the time comes. In fact, instead of selling, you might want to consider putting your coins to work for you in the decentralized finance (DeFi) markets. 

I didn’t perfectly sell the top, far from it, and I didn’t perfectly buy the bottom. Almost no one did. Remember the vast majority of the money is made on either side of the high and low tide marks. #bitcoin #crypto

— Lark Davis (@TheCryptoLark) January 27, 2023

On the flip side, the crypto winter of 2022 has shown us that when investors are feeling overly  afraid, worrying and acting irrational, it could represent a buying opportunity that you simply don’t want to miss. This is especially true for projects whose technology is only getting better and whose product is looking to be a good market fit. 

So to be clear, when the index is reflecting fear, this could potentially be the time to enter the market. If you’re good, you’ll be able to invest early in the fear cycle and then just hold on for dear life. The selling might endure for a while, but in time, for good projects, it’s only a matter of time. You want to be on the right side of any shift in sentiment. 

However, when there’s fear, it is not a time to buy anything and everything. The index is a good starting point, but it is not a substitute for doing your own research. Look for projects that might have gotten severely punished but have solid fundamentals or promising technology that other investors are missing. 

Never buy a coin because "someone said so". DYOR.

— CZ 🔶 Binance (@cz_binance) January 26, 2023

Contrarian Investing 

Contrarian investing is a strategy that goes against the herd mentality, and using the crypto fear and greed index is one way to do it. Assuming you’re investing in a project whose fundamentals have not changed, buying during fear may be a great move 

Investing against the herd is not easy. If it were, everyone would be doing it. If you could muster the fortitude for it, you are well on your way to investing like contrarian investor Warren Buffett, only applying it to the crypto markets. 

And while the Crypto Fear and Greed Index does not examine fundamentals, it will give you a window into what other investors are feeling. How you use that information to your advantage is up to you.