Exploring Bitcoin Fear and Greed Index

Nowadays, cryptocurrencies are deemed an investment asset joining the likes of gold and stocks. While considered relatively new compared to other investments, some tools commonly used in stock exchange markets can be applied to crypto trading. One of the said tools is Bitcoin Fear and Greed Index.

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Fear and Greed Index: A Brief Explanation

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The Fear and Greed Index is a market sentiment indicator that is used to measure market movement, especially in financial markets, over a period of time. It was developed by CNN Business to gauge market sentiment and determine if stocks are fairly priced or not.

As the name suggests, what is ultimately being measured is the emotional state of investors, represented as either Fear or Greed. Fear results in investors trading their stocks below their intrinsic value. On the other hand, Greed will cause an upward trend in which investors chase after potential gains from their stocks.

The index measures seven indicators on a scale from 0 to 100. The numbers are subsequently calculated by determining the average of each indicator with equal weights. A reading of 50 is deemed as “neutral”; anything more than that signals “greed”, while anything below signals “fear”.

The seven indicators of the Fear and Greed Index are as follows:

• Market Momentum

This indicates the strength and direction of current market trends. Market momentum is measured by calculating the Standard and Poor’s 500 Index (S&P 500) against its Moving Average (MA) over a period of 125 trading days. A slowing momentum signals Fear, and growing momentum signals Greed.

• Stock Price Strength

This indicates which stocks are struggling and which ones are thriving. The strength is measured by looking at the number of stocks on the New York Stock Exchange (NYSE) hitting a 52-week high and comparing them to the ones hitting a 52-week low. Significantly fewer highs than lows signal Fear, and vice versa.

• Stock Price Breadth

Stock price breadth refers to the amount or volume of rising shares compared to falling shares on the NYSE. Like stock price strength, a low (or even negative) comparison between rising and falling shares signifies Fear.

• Put and Call Options Ratio

It compares the trading volume of put options to call options. The ratio determines the indication of Fear or Greed. If put options surpass call options, it’s Fear; otherwise, it’s Greed.

• Market Volatility

This indicator measures the magnitude of price fluctuations in the stock market using CBOE Volatility Index (VIX). CNN’s Fear and Greed Index treats an increase in market volatility as a sign of Fear.

• Safe Haven Demand

An assessment of the demands for safe-haven assets like gold or Government bonds. The basis of measurement is the distinction between Treasury bond and stock returns over the past 20 trading days. An increasing safe-haven demand can also become a signal for Fear.

• Junk Bond Demand

An examination of the demands for high-yield or speculative bonds over junk bonds. More yields for junk bonds signify that investors are willing to take more risks. Junk bond demand itself is used as a signal for Greed.

Interpreting Bitcoin Fear and Greed Index

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The fundamental difference between the stock market and cryptocurrency lies in the latter’s complexities and intricacies. Cryptos are extremely unpredictable and volatile even seasoned traders tread cautiously in this market. 

Even though its main application is in the stock market, the Fear and Greed Index can be applied to help investors trade in the crypto market, especially in Bitcoin. The application and indicators themselves will be slightly different, but the methodology stays the same for the most part.

As opposed to seven, Bitcoin Fear and Greed Index use at least five indicators in its calculation: Volatility, Market Volume/Momentum, Social Media Sentiments, Dominance, and Google Search Trends. These indicators are usually measured over a period of either 30 or 90 days.

Past Trends for Bitcoin

As of June 25, 2023, the crypto Fear and Greed Index is slightly Greed with 64-65 points across three different trackers. According to alternative.me, Bitcoin has been gaining Greed values over the last week.

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Over the month of June, the Fear and Greed Index showed overall neutral stability up until the 20^th. The value started to spike on the 21^st, leaping from 49 to 59 in just a day. Bitcoin Fear and Greed Index value continued to rise over the course of 4-days, showing no signs of significant descent, perhaps for another month or so.