Bitcoin has a wild ride with prices over the past year. These upswings and downswings in price have led to the popularization of something called the Bitcoin Fear and Greed Index.
Basically, the Bitcoin Fear and Greed Index measures fear and greed about Bitcoin. The general pattern is that a lower price means more fear. A higher price of Bitcoin means more greed.
With that in mind, this article will explain everything you need to know about the Bitcoin Fear and Greed Index including how it measures fear and greed, who created it, and its accuracy.
What Is The Bitcoin Fear And Greed Index?
As mentioned previously, the Bitcoin Fear and Greed Index measures the amount of fear and greed in relation to Bitcoin. This is, in our opinion, one of the more important measurements about Bitcoin.
Why is it so important?
Humans are simply too emotional to make an informed buying or selling decision. This is especially true for retail investors that often decide to purchase Bitcoin once everyone is already talking about Bitcoin.
People usually only talk about Bitcoin, and try to convince others to purchase it, when the price is high. This is obviously a recipe for disaster when deciding when to buy and sell an asset.
How The Bitcoin Fear and Greed Index Measure Fear And Greed
First of all, the index is published by Alternative.me. That is a website that compares different software against each other. But they do publish the Index.
Anyway, the Index is built by following online trends and weighting them to form the Index. The trends, and weighting, it tracks are the following:
- Volatility (weight: 25%) – A more volatile crypto market is either fearful or greedy depending on which way the price moves.
- Trading Volume (weight: 25%) – A large trading volume during an upswing is a sign of greediness. The opposite is true during a downswing.
- Twitter (weight: 15%) – Alternative.me tracks Bitcoin related hashtags on Twitter. More engagement on Twitter posts relating to Bitcoin is an indicator of greediness.
- Dominance and Market Cap (weight: 10%) – An increase in Bitcoin’s market cap compared to altcoins indicates that fear is up as Bitcoin is viewed as a ‘safe’ crypto asset compared to altcoins.
- Google Trends (weight: 10%) – Finally, they track Google Trends for Bitcoin related queries. Certain queries indicate fear (ie. Bitcoin price manipulation) while others indicate greed (ie. where to buy Bitcoin?).
You may have noticed that the above weighting does not add up to 100%. That is not a typo.
The Bitcoin Fear and Greed Index used to use cryptocurrency surveys for 15% of the weighting. But this was abandoned because of selection bias in the survey.
Is The Index Accurate?
Yes, the Bitcoin Fear and Greed Index is mostly accurate. It says greedy when the price is high and fearful when the price is low. It is usually ‘very greedy’ immediately before a downturn and ‘very fearful’ before a bounceback.
That said, it’s still only one tool in your arsenal for investing in Bitcoin. The next section will cover how to use the Index to profitably invest in Bitcoin.
Using The Index To Profitably Invest In Bitcoin
First things first, the best strategy for investing in Bitcoin is something called dollar cost averaging (DCA). Basically, this means instead of buying all your Bitcoin at once, you spread the purchase out over a few days, weeks, or months.
For instance, if you want to invest $10,000 in Bitcoin by DCA, then you could buy $1,000 per day, week, or month.
This is mostly psychological because it spreads out your cost basis more than simply buying all at once.
However, you could still use the Bitcoin Fear and Greed Index to time your entry into the market. For instance, if the Index is very fearful, then you could invest more money on that particular day.
This is not the biggest advantage of the Index, though. The biggest help the Index provides is when it’s time to sell your Bitcoin.
Our recommendation is to sell when the Index is high (>70). Will this maximize returns all the time?
No. It often leaves out an extra 20% or so before the crash, but this is a good enough indicator to sell if you want to sell. The good part is that an extremely high greed factor is almost always followed by a crash, so you will have an opportunity to re-purchase cryptocurrency.
Where To Access The Bitcoin Fear and Greed Index?
The Bitcoin Fear and Greed Index can be accessed on the BitcoinFear Twitter account. The Index is updated two times a day.
How To Read The Bitcoin Fear and Greed Index?
It’s extremely easy to read the Index. A lower number is an indicator of fear while a higher number is an indicator of greed. This is clarified by the announcement of ‘extreme fear’ or ‘fear’ and ‘extreme greed’ or ‘greed.’
That covers it for the Bitcoin Fear and Greed Index – it’s not a difficult index to read. And it can provide some very useful information about the best time to purchase or sell your Bitcoin. That said, it’s still just a tool in your arsenal for maximizing your cryptocurrency gains.