Bitcoin Fear and Greed Index: Explained

By Kirsty Moreland

Supply and demand is the invisible hand driving any market – but it’s not the only factor. Besides scarcity, there’s a further invisible factor in play when it comes to markets, especially in the age of instant communication: sentiment.

If you’re familiar with the terms apeing in, bullish, bearish, HODL or FOMO, then you already know a thing or two about how emotion can impact our perceptions. The same item could seem like a valuable commodity one day, and big risk the next, not based on its utility or fundamental value, but purely on the sentiments of the market.

The big question is this: how can crypto traders separate emotion from fact, in order to make objective decisions as they navigate the space?

This is where the Bitcoin Fear and Greed Index comes into play.

What Is The Bitcoin Fear and Greed Index?

The Bitcoin Fear and Greed Index is a measure of market sentiment relating to Bitcoin, presented on a scale from 1 to 100.

The lower the score, the more fearful the market is about the future of Bitcoin; the higher it is, the more there is confidence in the market surrounding Bitcoin. Conversely, the closer the scale measures to 100, he more “greed”, or excitement, is exerting force on the market.

Extreme Fear

A crypto bear market is generally where you’ll observe the highest level of “Fear” in popular sentiment. When the market crashed in 2022, for example, the Index was showing a score of only 12/100 – sentiment in the extreme caution zone of perception.

Extreme Greed

Meanwhile, in February 2021, the index measured a whopping 92, shortly after Elon Musk declared Tesla’s huge $1.5bn investment in the currency – a fact that buoyed the entire market and sent a new surge of confidence through the crypto space. Not surprisingly, the price also spiked.

To dive further into the markets, make sure you check out the full article on bull vs bear markets.

How is the Bitcoin Fear and Greed Index Calculated?

But, before we get stuck into how you can use the scale yourself, what about how it’s calculated? Well, the Bitcoin Fear and Greed Index itself is an aggregation of a few key metrics that monitor sentiment in different ways. Here’s what it takes into account:

Recent Market Volatility

This is calculated from the volatility and drawdown of Bitcoin’s price, in comparison to the volatility over the 30- and 90-day periods of average velocity. In essence, exceptional volatility will contribute to an overall assessment that is fearful, since the market will be uncertain of what’s next.

Trading Volume 

Trading volume is another indication of the demand for Bitcoin. Generally speaking, high buying volumes in a positive market are a sign that greed and FOMO may be in the driving seat – something likely to be reflected in the price of BTC itself.

Social Media Content Analysis

Social media goes beyond memes and likes – it’s also the biggest, most detailed data set known to man. Twitter alone has just shy of 400 million users, and provides a goldmine of insight into how large groups of people are feeling.

Not surprisingly, this data is used to inform the Bitcoin Fear and Greed index. To clarify, mentions, hashtags, engagement, reactions, and even the text itself are all aggregated to give an overall reading of sentiment, and counted within the broader assessment.

Qualitative Expressions of Confidence

On a similar note, using Google Trends and analyzing what people are searching for, and what terms they are using, gives a hint as to how people feel about the market. For example, good search volume for the query “where can I buy Bitcoin”, indicates positive sentiment because it hints that people want to invest. 

How to Use the Bitcoin Fear and Greed Index

How you use the Bitcoin fear and greed index depends on what you want to do. If you’re trying to stack crypto before it skyrockets, you’ll be able to see when other people are making that same decision. If you’re trying to decide if it’s the right time to drop your project, you might also want to use it to gauge the market sentiment. However, anyone that uses the crypto fear and greed index should bear in mind that it only shows you positive or negative sentiment. Doing your own research is always essential to find out the reason behind the market sentiment.

Benefits of Using the Bitcoin Fear and Greed Index

Obviously, there are plenty of benefits of being able to assess how the market feels about crypto. The main reasons people use the Bitcoin Fear and Greed Index includes the following:

Rational Decision Making

Trading on emotion is never a good strategy, nor is it rational. But since the market’s overall feeling about Bitcoin does impact its value, you can glean some very interesting insights from monitoring sentiment.

Spotting Opportunity Beyond the Headlines

Assessing the market objectively not only allows you to make better decisions – but may also enable you to identify opportunities. For example, a time of extreme fear may mean an opportunity to buy at a lower price, with lower risk to you as a buyer. Conversely, identifying times of extreme greed may present opportunities for holders to sell at a good price, relative to what they initially paid.

Remember, in both these instances, the fundamentals didn’t change; only the sentiment did. There is leverage in how that change is handled.

Limitations of the Fear and Greed Index

Advantages always come with disadvantages. And of course, the Bitcoin fear and greed index is not infallible. If you’re using it to analyze market sentiment, make sure you watch out for its limitations, such as the following.

Narrow in Scope

Sentiment is a significant metric for any marketplace, but it is by no means the only thing influencing price. It’s important to remember that the Fear and Greed Index only measures emotion – it is not a holistic view of the market, doesn’t take into account underlying utility or complex economics, and should only be used in conjunction with other investment tools and valuation metrics.

Cannot Predict Future Events

The metric is based on past data and, no matter how accurate that reading is, it can’t predict the future. While your decisions are based on what you hope for in the future, the index is limited to telling you how people feel right now, based on what we already know.

In short, your decisions will still carry risk, no matter how well-informed they may be.

Fear and Greed Is Only The Beginning: So What’s Next?

The Fear and Greed Index is only one small element of the wider crypto trading picture. If you want to make the best decisions, make sure to check out the full article on how to trade crypto. That said, understanding this metric will give you valuable insight into the market. Understanding its utility, along with other analytics tools, enables you to make rational decisions about your own assets and how to manage them – and eliminate crypto’s notorious FOMO from your journey.

Knowledge is Power