How is the Fear and Greed index calculated for cryptocurrency?

Gauging investors' sentiments when handling cryptocurrency is one of the most interesting and valuable factors in determining the market's path. However, while the measurement should help users make an informed decision, it sometimes contributes to their heightened fear.

Understanding the psychology of fear and greed in cryptocurrency can, however, help people identify the root of their feelings, allowing them to prevent actions triggered by irrational fear. That’s what the fear and greed index is trying to calculate through gathering compelling information that could offer an overview as precise as possible.

Traditional markets make use of stock price momentum and the safe haven demand, but things are a bit different in cryptocurrency, so let’s explore more about it.

Those who want to determine the potential future of crypto prices should look at the Fear and Greed index, which can help understand whether prices will go up or down. That’s because the index is calculated through factors like:

The index ranges from 0 to 100, and two scenarios determine the market's future. When the index ranges from 0 to 24, it indicates extreme fear. As market trends are considerably bearish, there are numerous buying opportunities since few sellers are present.

On the other hand, the market is more bullish when the index goes between 76 and 100, showcasing extreme greed. In most cases, this leads to a lot of FOMO (fear of missing out), so there are chances for a reversal to the downside. Hence, the same directional bias about the market will trigger trends.

Trading biases work similarly to those encountered in our daily lives, but they are often overlooked due to their complexity. In addition, investors and traders must already consider a vast number of other factors when determining their next course of action. However, biases in crypto exist, and they affect one’s ability to take an informed and non-emotional decision.

For example, there are the most common cognitive biases that alter crypto investments:

Bias can be one of the most dangerous challenges in investing and trading, as it hinders the capacity to see things objectively and rely on calculations and research. Luckily, through practice, there are ways to overcome it:

With numerous types of biases that can cloud our judgments, identifying and eliminating them can significantly improve performance and strategies.

FOMO is another overlooked feature that affects one’s trading ability. As fear is one of the strongest sentiments humans can experience, it’s no wonder it can trigger action before thinking about it. Fear is also part of the FUD (fear, uncertainty, doubt) index, which occurs when misinformation on social media is so well-written that it induces panic within investors.

However, FUD can also happen when users misinterpret negative information, including market corrections that follow a downturn. Hence, instead of being logical and knowing that the market cycles will always change. According to Binance.com Research, "The traditional four-year market cycle is nearing the end of the bull run, but this time may differ. Institutional Bitcoin ownership has risen from 0.9% in 2014 to 19.8% now, which could mean smaller pullbacks." So, better times will come, investors panic, and this is how markets decline in value.

Managing FOMO is similar to handling biases: it all comes down to practicing due diligence and research. Setting clear goals and following them is the most effective way to avoid falling prey to uncertainty. Additionally, being prepared to ride out the dip or take profits is ideal for identifying opportunities.

As the cryptocurrency industry evolves and trading or investing is safer than it was a few years ago, some may believe that measuring fear and greed will become less relevant in the future. At some point, Bitcoin will likely become a legal tender and be widely adopted globally as a means of payment, which may help mitigate its volatility considerably.

However, this index is also used for established markets, such as the stock market, as these investments are influenced by real-world activities and factors that are constantly changing. Hence, users can manage volatility and risks while recognizing that these assets are influenced by the performance of real-world industries.

That’s why it’s always advisable to have a safety net when investing in any kind of asset, which implies having a savings account with at least six months of expenses, for example. In addition, making crypto investing a side hustle rather than relying entirely on its profits is best, especially for beginners.

The Fear and Greed Index is calculated based on several factors, including Bitcoin’s dominance, social media activity, and market volume. It is a useful factor for investors and traders who want to gauge the overall sentiment and understand whether the community is fearful or greedy, allowing them to determine whether to sell, buy, or hold. However, they must also manage their biases against investments and learn to navigate fear in a market of opportunities and uncertainty.