What is the Fear and Greed Index and how it influences the crypto world?

High volatility in the crypto space is very common and that has become a magnetic force pulling people towards cryptocurrencies.

Many of us trade crypto based on our emotions and don't even do proper research before making a decision whether to buy or sell a specific cryptocurrency. 

The Fear & Greed Index is associated with this only. The Fear of Missing Out an opportunity (FOMO) is one of the most common issues.  On the other hand, another form of fear, a Fear of Losing, signals the nervousness and uncertainty across the market. The fear of losing money triggers a few classical models of behavior: avoidance or overreacting.

The crypto market isn’t the only market that is influenced by emotions. The concept of the Fear and Greed Index was first developed by CNNMoney to model the traditional financial market’s mass psychology. It measures two of the primary emotions that drive investors in the market and influence how much they are willing to pay for stocks. 

The Fear and Greed Index is a score between 0 to 100, where any score below 30 indicates fear, above 60 indicates greed, and it indicates a neutral sentiment between 30 to 60.  Note that the original index wasn’t designed to measure the crypto market sentiment. However, it has now been used in the crypto space too.

When it comes to the crypto sector, Alternative.me, which publishes crypto fear and greed index metrics describes it: “With our Fear and Greed Index, we try to save you from your own emotional overreactions.”

According to Alternative.me for 2 November 2021, the crypto sector is currently at the level of 'Greed' with 73 on a scale between zero to 100. In November 2020, the level was at 74.


How the Crypto Fear and Greed Index is measured

The Crypto Gear and Greed Index is measured by six metrics, and each is weighted differently. Let us check each of them separately. 

Volatility

Volatility is measured by comparing the maximum drawdowns (drop in price) of any cryptocurrency at present, with its corresponding average drawdowns over the last 30 days. The higher frequency of price drops can give a rise to high volatility and this is a sign of a fearful market.

Market momentum & volume 

The market momentum is measured by indicators such as the relative strength index, which infers that an asset is either overbought or oversold. The average of this, along with the average trading volume over 30 days, is combined. An overbought market with a high volume would indicate a greedy sentiment. The recent example of this is Shiba Inu, which has been bought by millions and its prices have increased by over 51% in the last seven days. 

Bitcoin market dominance 

The rise in Bitcoin dominance is caused by a fear of too speculative altcoin investments. If Bitcoin dominance shrinks, investors are willing to put their money into more volatile and speculative altcoins, a sign that the market is bullish on the overall crypto space.

Social Media mentions 

The frequency of various hashtags on Reddit and Twitter are analysed, along with social media engagement metrics such as the number of shares, likes, and comments. An unusually high interaction rate results in a growing public interest in the coin and in our eyes, corresponds to a greedy market behaviour. 

Squid Game: Classic Example of Fear and Greed Index

We might see short term high price volatility in crypto and that is quite common. One classic example is Squid Game, a crypto project inspired by Korean series on NetFlix Show. The project was launched on 26 October 2021 at $0.01. The project also promised to offer access to an online play-to-earn game inspired by the brutal survivor drama. After that, the token value rose dramatically by 44,100% to $4.42 in just 72 hours. It was also reported by global media outlets like the BBC and CNBC.

On 1 November prices stood at $38 as of 6am London time, accelerating to $90 by 7am, $181 by 8am, and $523 by 9am. After 35 minutes, SQUID crossed $2,861, an increase of 7,500%. However, by 9.40am Squid price dropped to just $0.0007926, registering a 99.9999% fall. 

SQUID owners told CoinMarketCap that they had little choice but to watch helplessly as the token’s value rose. An anti-dumping mechanism that was imposed by the project’s developers meant they could not sell. 

This is typically an unfortunate sign of a rug pull, defined as when developers abandon a project and take investors’ funds.

Only advice to users is never go by the flow of the crypto market. Always do a Klever and proper research before trading for any cryptocurrency. Remember,  it is your hard earned money that you are investing. 

Always invest Kleverly!

Jagdish Kumar
Klever Writer
Follow me on Twitter.com/TokenBharat

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