Based on how investors feel about the market, the fear and greed index shows whether the market is bullish or bearish. This index evaluates fear and greed, the two primary emotions that influence investors. Investors can use this daily-measured index to determine the market’s mood. If the index detects greed in the market, a correction is required, whereas fear in the market indicates a buying opportunity.
The crypto fear and greed index
The most frequently asked question by investors is how the index is calculated. Here is how it is.
The crypto fear and greed index gives a number between 1 and 100. When the index reads “1” it indicates that investors are selling, and the crypto market experiences extreme fear in this zone. Whereas the index’s number 100 indicates that investors are buying aggressively. These numbers are measured by monitoring the buy and sell volumes.
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When the index is close to 1, it is generally considered a buying opportunity. When the index shows a number close to 1, investors sell their crypto coins out of fear of falling crypto prices and market volatility. Investors are afraid to invest in new crypto assets in this scenario.
On the other hand, the market is experiencing extreme greed when the index reaches 100.
Using the Fear and Greed Index
Dividing the fear and greed index into its four quadrants will help you understand how to use it as a tool.
When the index score is between 0 and 24, the crypto market is in a state of extreme fear. Due to the low price and the possibility of a price reversal, this quadrant of the index indicates that it is a buying opportunity.
When the index score is between 24 to 49, the market is still fearful, but not in an extreme way. Users seek information at this stage, and the costs are low, but not very low.
When the fear and greed index is between 50 and 74, greed is slowly taking over the market. This quadrant shows that the worth of crypto is rising, and financial backers are purchasing crypto resources. The crypto market is bullish in this quadrant.
The crypto market exhibits extreme avarice in the quadrant with an index score of 75 to 100. In this quadrant, the crypto assets market will soon undergo a correction.
Bitcoin (BTC) is directly related to the crypto fear and greed index. In a market that exhibits high greed, Bitcoin has a high value. From the point when the market drops, the worth of Bitcoin generally corrects.
Factors influencing the Fear and Greed Index
- Volatility: The index compares the 30 and 90-day averages of volatility numbers and evaluates maximum drawdowns. The market’s increased volatility indicates fear. 25% of the index’s total value is accounted for by the volatility factor.
- Volume or momentum: The market’s momentum and current volume are measured by the greed and fear index against the 30 and 90-day averages. When there is a lot of momentum and volume, the final index score goes up. Momentum and volume factors account for 25% of the index’s value.
- Online News: All crypto-related mentions and hashtags are evaluated and compared to previous averages by the greed and fear index. A rise in market activity is indicated by high positive social media mentions. Social media mentions and hashtags account for 15% of the index value.
- Trends on Google: The fear and greed index also evaluates the numbers of Google trends. A higher number of crypto assets searches on Google suggests that the market is rife with greed. Google trends account for 10% of the index’s value.
- Crypto dominance: Bitcoin’s strength demonstrates the market movements. When alternative cryptos gain market share, the market turns greedy. 10% of the index’s value comes from the crypto dominance factor.
- Surveys: The fear and greed index conducts a weekly survey to assess the market. Each survey is completed by more than 3,000 people. These surveys account for approximately 15% of the total index value.
Benefits of the fear and greed index
The crypto fear and greed index is a reliable technical indicator. But this technical indicator should always be backed by sound fundamental analysis of the market. Below mentioned are a few benefits of the fear and greed index
- Investors don’t have to spend a lot of time researching because the index helps them move in the right direction.
- The fear and greed index can be used to comprehend sentiments in the crypto market. Investors should be cautious when the index number reaches extremes. Investors can use the fear and greed index score to decide whether to buy or sell crypto assets.
- The fear and greed index can be used by brave crypto investors to bet against market trends. In a volatile market, acting against the market can be rewarding.
To sum it all up, the fear and greed index provides insight into the market’s mood or state. This index can be a useful tool for crypto investors because it is a reliable indicator of how buyers and sellers are interacting. Before deciding to invest, investors should conduct their due diligence through research since there is no sure method for predicting the movements of markets.
Many crypto investors have found the greed and fear index to be a useful investment tool. Additionally, this index is one of the simplest methods for determining the market’s mood or sentiment.
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