Bitcoin price crashes can leave investors nerves on a knife-edge. When prices dip, investors, therefore, scramble to seek out reassurances online that prices will recover. When doing so, one tool investors use is the so-called Bitcoin Fear and Greed Index.
What is the Bitcoin Fear and Greed Index?
Using analysis of investor sentiment to predict when is a good time to buy or sell investment assets is nothing new.
In 1993, the Chicago Board Options Exchange created the CBOE Volatility Index (VIX). This is a tool that measures market risk, by analyzing recent price inputs of the S&P 500, together with general investor sentiments.
Shortly after the launch of the VIX, CNN Money created their own Fear & Greed Index (FGI). Like the VIX, the FGI attempts to measure investor emotions of fear and greed, before extrapolating what general sentiments might mean for short and long-term stock prices.
The VIX and CNN’s Fear and Greed Index work on the premise that greed and strong investor confidence help drive up stock prices.
When investors are more fearful that markets are about to correct or dip lower, the VIX and FGI assume that stock prices will fall.
In both cases, the VIX and FGI use a simple speedometer-like chart to show investors which direction stock market sentiments seem to be leaning in on a daily, weekly, and monthly basis.
Because the VIX and FGI are widely used by stock traders, several Bitcoin Fear and Greed Index apps now exist. Like the VIX and FGI, these measure general investor confidence in the cryptocurrency markets. In doing so, they help investors plan when to buy, sell and accumulate digital assets.
What is the Best Bitcoin Fear an Greed Index to Use?
At present, the most widely used Bitcoin Fear and Greed Index is made available by Alternative.me. This can be found by clicking here.
As the most widely trusted Bitcoin Fear and Greed Index, the Alternative.me index is updated daily with an analysis of current Bitcoin investor sentiments and emotions.
How to Use Fear and Greed Indexes
Typically, many people who use Bitcoin Fear and Greed Index apps do so to determine the best time to buy and sell holdings.
When markets are in a state of extreme fear, many investors buy Bitcoin and other digital assets. This is thanks to fear usually following mass sell-offs that result in lower Bitcoin prices.
If indexes show that investors seem to be getting too greedy or overconfident, many investors choose to liquidate assets. This is thanks to the fact that excess greed usually means that a market correction is imminent.
Are Fear and Greed Indexes Reliable?
Historically, fear and greed indexes have proved to be useful tools to use to predict major market turnarounds. However, it is important to note that no fear and greed index is 100% reliable.
In March this year, the Bitcoin price corrected by over 50% in under 24-hours. This happened just 24-hours after the Bitcoin Fear and Greed Index suggested that the next 24-hours would (potentially) be a good time to buy Bitcoin.
Given that the accuracy of any fear and greed index can’t be guaranteed, traders shouldn’t base buying and selling decisions solely on analysis of market sentiment. At the same time, though, indexes can prove useful to traders who understand how to use data in conjunction with other trading signals
This is not meant to be investment or financial advice and is an opinion of the author.