Cryptocurrency fear and greed index
Why measure the fear and greed of cryptocurrencies?
Cryptocurrency market behavior is very emotional. People tend to be greedy when the market goes up, which leads to FOMO (Fear of missing out). Also, people often sell their coins in an irrational reaction to red numbers. With our Fear and Greed Index, we are trying to save you from your own emotional reactions. There are two simple principles:
Extreme fear can be a sign that investors are too worried. It could be a buying opportunity.
When investors get too greedy, it means that a correction awaits the market.
Therefore, we analyze the current sentiment in the bitcoin market and convert the numbers into a simple score from 0 to 100. Zero means “Extreme Fear” and 100 means “Extreme Greed”. For more information about our data sources, please see below.
Data sources
The data is taken from the following five sources. Each data point is evaluated, just like the day before, to visualize an important progression in the changing mood of the cryptocurrency market.
First of all, the current index is only for bitcoin, as most of it is the volatility of the coin’s price.
But let’s list all the different factors we include in the current index:
Volatility (25%)
We measure bitcoin’s current volatility and maximum drawdowns and compare them to their respective averages over the past 30 days and 90 days. We argue that the unusual increase in volatility is a sign of fear in the market.
Market momentum/volume (25%)
We also measure current volume and market momentum (again compared to the average of the last 30/90 days) and add these two values together. Typically, when we see high volume buying in a positive market on a daily basis, we conclude that the market is behaving too greedily / too bullishly.
Social Media (15%)
While our sentiment analysis on reddit is still not included in the index, our twitter analysis is. There, we collect and count posts on various hashtags for bitcoin and check how fast and how many interactions they receive. An unusually high interaction rate leads to increased public interest in the coin and, in our view, is consistent with greedy market behavior.
Dominance (10%)
The coin’s dominance resembles the market capitalization share of the entire cryptocurrency market. We believe that bitcoin’s increasing dominance is due to the fear (and hence reduction) of overly speculative investments in altcoins, as bitcoin increasingly becomes the safe haven of cryptocurrencies. On the other hand, when bitcoin’s dominance declines, people become more greedy, investing in riskier altcoins, dreaming of their chance in the next big bull run. In any case, analyzing the dominance of coins other than bitcoin, one could argue the opposite, as more interest in altcoins could indicate bullish/greedy behavior towards that particular coin.
Trends (10%)
We take Google Trends data for various bitcoin-related search queries and analyze those numbers, especially the change in search volume, and recommend other search queries that are popular at the time. For example, if you look at Google Trends for “Bitcoin”, you can’t get much information from the search volume. But currently, you can see that there is a +1,550% increase in the “bitcoin price manipulation” query in the related searches block (as of 05/29/2018). This is clearly a sign of fear in the market and we are using this for our index.