What is The Crypto Fear and Greed Index?

The Crypto Fear and Greed Index is a benchmark created by Alternative.me in 2018. The tool uses a combination of different data to assign a score from 0 to 100 to the current sentiment on the market. 

Using this tool, crypto traders and investors can spot the bottoms and tops of the market. This makes it easier for them to make rational decisions that would positively affect their portfolio in the future. 

In this article, we’ll give you more details on how the crypto Fear and Greed Index works and why you should use it for your daily investments. Enjoy! 

What is the crypto fear and greed index?

The Crypto Fear and Greed Index is a benchmark that defines investor sentiment. Introduced by Alternative.me back in 2018, the Fear and Greed Index takes its roots from CNN’s Money Fear and Greed Index. Yes, crypto bros didn’t think of this tool on their own. 

Back then, Alternative.me divided the 100 max score into four distinctive zones: Extreme Fear, Fear, Greed, and Extreme Greed. Each zone represents different things: 

• Extreme fear: Retail investors are actively selling assets at a discount, implying that traders can buy undervalued tokens for cheap. 
• Fear: Market is uncertain. Some investors start losing interest and sell their assets, but the bottom is still not in. 
• Greed: Optimism is kicking in as retail investors are pouring more liquidity into the market. Top is still not in, but most tokens are starting to get overvalued. 
• Extreme greed: The best time to sell. Retail investor interest is at its highest and assets are getting overvalued. 

Now, why is this tool so popular among Web3 investors? Unlike technical indicators, the Index gives a complete picture of investor sentiment. It analyses important data and assigns a score to reflect the current state of the market, not of an individual token. 

The tool gained popularity after the 2017 Bitcoin bull run. Traders and investors started using the Index to identify market tops and bottoms with the aim of buying undervalued assets. 

How is the Fear and Greed Index calculated?

Now that you know what the crypto Fear and Greed Index is, it is time to answer the most interesting question: How is it computed? 

The Index is computed from five crucial metrics: volatility, trading volume, social media activity, Bitcoin dominance, and Google Trends. This data is then compared to historical averages over 30 and 90 days to spot unusual patterns.

Depending on its importance, each component has its weight in the final result. Alternative.me chose to place Volatility and Trading Volume as the most important components of their Index. Each of these metrics makes up for 25% of the final score. 

Next in line is Social Media Activity. Crypto is a market that’s dominated by KOLs and Influencers. One tweet from Elon Musk can send Bitcoin into the sky or cause it to drop like a stone. That’s why Alternative.me assigned 15% of the total score to this component. That’s a lot when you think that CNN’s Money Fear and Greed Index never had such a component. 

Bitcoin Dominance and Google Trends make for another 10% each. When Bitcoin’s market share rises, it signals fear as investors seek safety. Falling dominance suggests greed as money shifts into altcoins. Just like with Social Media Activity, the Index tracks Bitcoin-related search terms. A surge in searches can reflect increasing fear or greed. 

Historical insights from the crypto Fear and Greed Index 

Still uncertain about this Crypto Fear and Greed Index? Well, there’s more than 7 years of data backing its usefulness. Let’s look at the chart from June 2019 to October 2020. This shows how the Index reacts to major events, shifting its score as the market changes. 

Remember the Coronavirus crisis in Spring 2020? The crypto market experienced a massive sell-off that affected every token – from Bitcoin to altcoins and memecoins. 

On the flip side, in February 2021, the index hit extreme greed after Bitcoin’s price skyrocketed from $10,000 to $50,000 – driven by the DeFi summer boom. Sentiment remained high for over a month until news of China’s mining ban triggered a sharp decline.

Let’s take a closer example. The Crypto Fear and Greed Index hit 91 just after Donald Trump’s victory over Joe Biden. At the same time, Bitcoin hit an all-time high of over $100k, signaling the start of a bull run for altcoins. Since then, the Index plunged to 16 as the Trump administration engaged in a massive trade war with the world, with Bitcoin trading lower than $90k for almost a month. 

This historical data shows two key insights. Market sentiment can shift rapidly in response to the news, especially when we talk about the crypto world and Bitcoin. Sentiment can also remain at extreme levels for extended periods of time. 

Why do you need to use the crypto Fear and Greed Index more often?

Many traders often argue that technical indicators are better than the Crypto Fear and Greed Index. That’s not entirely true.

Technical indicators like the Relative Strength Index or Moving Averages focus solely on the price action of a single asset. For example, computing these technical indicators will show you how Bitcoin behaves, but the analysis will be isolated. 

The crypto Fear and Greed Index measures the emotional side of trading – the fundamentals of the market. Good traders pair these metrics to confirm signals and strengthen their strategies.

Where can you find the best Fear and Greed Index online? 

The easiest and quickest answer to this question is Alternative.me. This is the oldest and first website tracking the Crypto Fear and Greed Index. You can also follow the Bitcoin Fear and Greed Index on X for real-time updates to keep market sentiment insights in your feed.

Major crypto data platforms like CoinGecko and CoinMarketCap display the index, making it easy to track alongside other key financial metrics. Many traders check the index daily to spot market trends and adjust their trading strategies accordingly.

Use the crypto Fear and Greed Index to control your emotions 

The crypto Fear and Greed Index shows how irrational many investors are. They sell when they should buy, and vice versa, buy when they should sell. We bet you’ve got a friend who bought Bitcoin at $100k because “It is going only up, bro. I feel it.” To avoid being such an investor, here are some tips to control your emotions.  

Buy low, sell high

Warren Buffett’s advice is simple but meaningful: “Be fearful when others are greedy and greedy when others are fearful.” When the crypto Fear and Greed Index shows Extreme Greed, be fearful and sell because the market might be overheated and the assets overvalued. The same should happen when the market is in Extreme Fear. Many assets are undervalued and can be bought at steep discounts. 

Use dollar-cost averaging

DCA in crypto means making small purchases every month to minimize the effect of volatility. Increase the value of those purchases when the Index shows Extreme Fear or Fear and decrease when the market is overheated. This way, you’ll always be above the market. 

Diversification

Ever heard of portfolio management? Well, the first thing they teach you there is to diversify as much as possible. 

You can never mitigate the market risk, but you can for sure mitigate the asset risk. Every asset added to your portfolio can reduce volatility and make your position more secure. 

How to trade based on the crypto Fear and Greed Index?

If you don’t have any experience with trading/investing, you can make trading decisions based solely on the Crypto Fear and Greed Index. Here’s what you should do to get okeyish results with this tactic. 

Bull market

If you’re in a bull market, monitor the Crypto Fear and Greed Index daily. Buy when the Index exceeds 50 – that’s the usual retracement in a bull market. The asset will go 20-25% down before another bullish push. 

Try not to buy assets when the Index is above 50. That’s overvalued territory, and assets are less likely to get price pumps in that position. This is the time to sell. 

Bear market

For the bear market, the situation is almost the same. However, in this situation, the Index is less likely to go above the 50 line. 

This is your accumulation period. DCA as much as you can so you have a big portfolio of assets. Once the bull market starts and the Index goes above 85-90, you can start selling – the top is likely in. 

Now, this is an extremely primitive tactic that can work but won’t bring in mega results. For better returns, you should pair the Crypto Fear and Greed Index with other metrics. 

What indicators besides the crypto Fear and Greed Index should you use?

The Crypto Fear and Greed Index is an amazing indicator that can tell you much about the market as a whole. However, you need much more information when you want to move into a specific asset or if you engage in momentum trading. Here are some other indicators to look at besides the Crypto Fear and Greed Index. 

Moving average convergence divergence

The Moving Average Convergence Divergence, or MACD, is a momentum indicator. It is used by traders to spot shifts in momentum and predict sell-offs or massive buys. The indicator tracks the relationship between two moving averages and signals potential buying opportunities. 

Relative Strength Index

The Relative Strength Index is another indicator that measures the market momentum. Just like the Crypto Fear and Greed Index, it gives a score from 1 to 100. When the RSI shows a score above 70, it indicates an overbought asset. A reading below 30 suggests that the asset could be oversold. 

Fibonacci Retracement

Fibonacci levels identify potential support and resistance areas where price reversals or retracements are likely. Traders use these levels to plan stop-losses and take-profit targets.

Is fundamental analysis useful In crypto?

The indicators we discussed above, including the Fear and Greed Index, are used to complete a technical analysis of an asset. However, many traders believe technical analysis is useless without a fundamental analysis. Is that also the case for crypto tokens? 

A thousand times, YES. Fundamental analysis should be the first thing a crypto trader does before buying a token. Technical analysis might work in the short term, but you can never buy a long-term position without fundamental analysis. 

Here’s what you should look to evaluate a crypto token from a fundamental point of view: 

Tech

Does the crypto project innovate an aspect of Web3 or Web2? Is the technology unique or somehow revolutionary? If the answer is no, the project is not worth investing in for the long term. 

Let’s now imagine that a new project is developing the same tech as Ripple. Who will choose the new kid on the table over Ripple – a multi-billion dollar company with years of experience? 

Whitepaper

No whitepaper = no long-term goals. Weak whitepaper = no serious interest from the team. A strong whitepaper is one of the most important assets a new project has. 

The whitepaper should clearly explain the problem the project solves and how its solutions are innovative and feasible. Reliable projects meet their roadmap milestones consistently

Institutional support

Sometimes, you don’t have time to make a full fundamental analysis, and that’s ok. Here’s something that you can use to still make successful investments. 

Look at the projects big players invest in. If Binance, Coinbase, a16z and more big players invest in a new project – chances are it will go into the top 100 cryptocurrencies by market cap. 

Can the crypto Fear and Greed Index be used to manage risk? 

Risk management is one of the most important things you must master when you invest in highly volatile markets like crypto. The crypto Fear and Greed Index is one of the best tools to manage risk and avoid unnecessary losses.

The Index tells you when the market is overheated, and you should sell. As we said above, a score above 75 means most crypto assets are overvalued, and you should start considering selling a portion of your portfolio. 

Remember, effective risk management involves balancing potential returns with acceptable risk. Combine the crypto Fear and Greed Index with other technical indicators to reduce emotional decision-making. 

Closing thoughts

The crypto Fear and Greed Index is a wonderful tool for traders and investors. It can be used to buy undervalued assets and sell them at the top – maximizing the profits of an investor or a portfolio manager. 

However, not everybody is ready to do this much work for a simple investment. Fortunately, we offer a more efficient solution at Trakx. Our crypto indices allow you to invest in diversified asset baskets with a single click, enhancing diversification and sound risk management practices while reducing transaction and trading fees through automatic rebalancing, making it a smarter way to invest in crypto.