Authored by: @hetty-rowan

Help! The Bitcoin price is falling, and will continue to fall! Oh, yes, the Bitcoin price is rising and continues to rise! One minute you're being choked by fear, the next day you're jumping around your house in ecstasy, just wanting more. Welcome to the world of crypto. A world in which you get to know yourself and are confronted with sides of yourself that you may not have known at all. And that you will have to learn to master. Welcome to the world of emotions like FEAR & GREED.

You wouldn't expect it right away. But it is precisely these two emotions that can play a very important role when you start investing! And to use that to your advantage, we have a Fear & Greed Index!

What is the Fear & Greed Index?

The fear and greed index is an indicator that investors use to determine sentiment in the market. This indicator has a scale of 0 to 100 where a low score indicates fear and a high score indicates greed.

The general market sentiment is therefore rather anxious, and some investors are hesitant when this index has a low score. The fear and greed index can therefore also be used as an indication when it is a suitable time to buy and/or sell crypto.

This score is subject to, among other things, macroeconomic news. Looking at Evergrande or the global pandemic, we saw very low scores, which had a direct effect on the price of both stocks and crypto. The Fear & Greed Index focuses specifically on the price action of Bitcoin. Why? To date, we see that altcoins almost always react to Bitcoin's price action.

What determines the price of Bitcoin?

The price is determined by classical economics, namely supply and demand. The more investors there are, the more the price will rise. Especially when you have a scarce supply, in this case only 21 million Bitcoin. It is therefore not surprising that we all help determine how much Bitcoin will be worth. Individuals such as Elon Musk as well as large institutional companies and even countries can give strong signals about Bitcoin, which will lead to price action.

Bitcoin has been a legal means of payment in El Salvador since 2021. Such macroeconomic news means that more and more people are gaining confidence in Bitcoin globally, and therefore more people are willing to invest. This is a kind of snowball effect, which can have a positive effect. But negative macroeconomic news can also take the price down completely, resulting in a huge sell-off. Consider, for example, the global pandemic.

Market sentiment

When trading, in both stocks and certainly in crypto, it is necessary to keep your emotions under control and to act from your mind. There are several indicators you can use for this. But however you look at it, these indicators are also often part of a self-fulfilling prophecy.

For example, when we look at the Stock-2-Flow model, some also argue that we are going to achieve this because investors are anticipating a self-fulfilling prophecy. When there is a predetermined price target of, for example, 100,000 dollars per Bitcoin, investors will act faster, so that the price will rise as a result.

Providing more insight to the market cycles

This psychology is also present in the fear and greed index. Contrary to this greed or fear, it can provide more insight into the market cycles. When we look at the past, we see that a bull run always ends in euphoria.

Suddenly your neighbor asks about Bitcoin, and you hear that the paperboy wants to buy a miner rig with his hard-earned money, and even your old uncle is sure that crypto is going to make him rich.

This euphoria is expressed in a high score on this fear and greed index. And when the score is high, investors switch off their emotions and take their profits in a timely manner, without being too greedy. Because they know that this euphoria is not infinite. And when large investors start taking their profits, you often see that small investors also sell quickly because otherwise their profits evaporate. This is also psychology which causes a snowball effect of sell-offs after which you see a drop, and sometimes just a complete crash in the price.

The Fear and Greed index has different levels

^{The Fear & Greed Index today!
Source}

|Values|Sentiment| |-|-|-| | 0 - 25|Extreme Fear| |26 - 46|Fear| |47 - 54|Neutral| |55 - 75|Greed| |76 - 100|Extreme Greed|

How does the fear and greed index work?

You have certainly heard of this index, but do you know how this index is created and how it works? Of course you want to benefit from knowing and analyzing this index. There are several factors that determine this score:

• Volatility (25%)

Volatility says a lot about the current market sentiment. The index looks at Bitcoin's volatility and compares it to both the 30-day average and the 90-day average. When this volatility is higher than these averages, the market is rather anxious and reluctant and thus fearful.

• Market momentum/volume (25%)

The volume is a good indication of price increases or decreases. For example, you can search the order book for buy-walls or sell-offs. These are large orders that are ready at a certain price. In addition to this volume, the indicator looks at market momentum and also compares it to the average of both the past 30 days and 90 days. Upward momentum is a bullish signal, while a downtrend is a bearish signal.

• Social media (15%)

Social media is increasingly used as a reflection of market sentiment. For example, is everyone raving about Bitcoin and crypto? Then this score will increase. If the future of Bitcoin in the short term is uncertain, then this is definitely noticeable on Social Media.

• Dominance (10%)

Bitcoin dominance is a recurring factor that we often use. This is also an indicator to predict when an altseason might start. This dominance calculates Bitcoin's market cap relative to the entire crypto market. Increasing dominance could indicate that people are pulling their money out of altcoins to take a position in Bitcoin. A declining dominance may indicate that profit is being taken on Bitcoin which probably will be invested in altcoins again.

• Trend (10%)

Google is now a semantic search engine. It is not surprising that many insights can also be obtained here. Here, the fear and greed index looks at Google Search trends for Bitcoin and other related keywords. An increase in this search volume and statements by certain websites or persons could be interpreted as a bullish signal, if investors assume that the supporters themselves will invest (again) after reading such posts.

• Survey (15%)

The last indicator wants direct feedback from investors. They inquire about market sentiment among individual investors.

How do you use the Fear & Greed Index for crypto?

Now that you know how the index is built, you probably want to know how you can use the indicator to get maximum return on your investment. It must be clearly emphasized that this is also only an indication for this index. You can never blindly rely on this indicator. It is not an established fact. And it remains only a tool. Always do your own research, and every investment is and will always be your own responsibility. This is NOT financial advice. But now that that's clear again, this index CAN help you in your own analyses.

In simple words, you should therefore invest when the index is on Extreme Fear, and sell when the index is on Extreme Greed. It should be clear that both on the Extreme Fear side 0 may not be the best time to invest, and you should certainly not wait until the index is at 100 before you sell.

“be greedy when others are fearful”.

You will usually also see a low price if the Fear and Greed index has a low score. As Bitcoin increases in value, you will also see the index score increase. The higher the score on this index, the greater the chance that investors will take their profits, which can lead to a sell-off.

That's why it's important to stick to your predetermined plan and not get too greedy. Before you know it you will see your profits evaporate.

Criticism of the Fear & Greed Index

This fear and greed index is nothing more or less than a clue based on various indicators. Some blindly stick to this index and base all their investments on this score, which is never a smart thing to do! Timing the market is tricky, and no one can say for sure where the top or bottom will be. Market sentiment is subject to a range of macroeconomic factors, whales and general sentiment.

Stick to the plan!

So for any investment you want to make, always do both your fundamental and technical analysis and make a clear plan for yourself, and stick to that! Determine what your achievable goals are and act from your mind, not your emotion. Although you can learn a lot from emotions, and you should never ignore your emotions 100%.

Happy Sunday!

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