Stock Market Fear and Greed

Crypto Fear and Greed

Wouldn’t it be great if you could get a strong sense of market sentiment to give you an idea of when cryptocurrencies are on the rise and when a sell-off is happening?  Well, there is such an indicator – Crypto Fear and Greed, and it is one of the leading due diligence factors we use at UnderstandingCrypto.info.  In this article, we will not only explain what it is and how we use it, but how to take your Crypto Fear and Greed research to the next level.

First, it is important to note that this article is not financial advice, and we are not financial advisors.  In fact, this article is our opinion and should be used for entertainment purposes only.  It reflects how we use crypto fear and greed analysis, which may be different than how others use it.  So always do your own due diligence.  We will include links inline to source material to help you in your journey, but if you have any questions, just let us know!

What is Crypto Fear and Greed?

The Fear and Green Index (we mainly use CNN’s) is a simple chart that gives deep insight into the current market.  The CNN version focuses on the stock market and the end-chart visualization is based on 7 indicators.

There is also a crypto fear and greed index, of which we use the one from Alternative.me.  This uses 5-6 indicators to influence its end-chart visualization.

While both are valuable, for analyzing crypto fear and greed specifically, we prefer to use the two of them together.  Additionally, other resources may have their version of the crypto fear and greed index, and if so, feel free to use whatever you are comfortable with.  Whichever you use, the only caveat is to make sure you utilize a stock market driven index and a crypto market driven index (and understand the indicators that influence both).

For this article, we will be using our two favorites: CNN for stock and Alternative.me for crypto.

Stock Market Fear and Greed

To begin our crypto fear and greed analysis, we always start with the stock market version of the index.  We do this because the crypto market has a tendency to move as the overall financial markets do.  While there is ever-growing divergence, the two are still very much connected.  Additionally, aside from their correlation, there is more holistic logic behind us starting with the stock version.  As people are feeling comfortable in traditional financial markets they are usually more aggressive in their investments.  In declining markets, they generally like to protect their investments.  This makes the stock market version of the fear and greed index a great leading indicator to the crypto fear and greed index.

As mentioned, for the stock market version of the index, we use the CNN version.  A detailed article can be found here, but to recap it:

  • Investors are driven by two emotions, fear and greed
  • In the fear stage, investors try and protect their investments and that can sink stocks, especially riskier investments, well below where they should be.
  • In the Greed stage, investors get more aggressive with their portfolios, and this can bid stock prices up too far.
  • For each indicator, of which there are 7, CNN ranks it from 0 (fear) to 100 (greed) with 50 being neutral.
  • All indicators are equally weighted.

So what are the 7 indicators?

  • Stock Price Momentum: The S&P 500 (SPX) versus its 125-day moving average
  • Stock Price Strength: The number of stocks hitting 52-week highs and lows on the New York Stock Exchange
  • Stock Price Breadth: The volume of shares trading in stocks on the rise versus those declining.
  • Put and Call Options: The put/call ratio, which compares the trading volume of bullish call options relative to the trading volume of bearish put options
  • Junk Bond Demand: The spread between yields on investment grade bonds and junk bonds
  • Market Volatility: The VIX (VIX), which measures volatility
  • Safe Haven Demand: The difference in returns for stocks versus Treasuries
Stock Market Fear and Greed

On the date of this article, 10/5/2021, the stock market fear and greed index is 27, so well within the fear category.  It was 25 the day before and 28 the week before, meaning it has been hovering in the same area for a while.  However, if you look at it from a month ago, it was 54, so near neutral.  This means over the last 4 weeks fear has increasingly driven the market.  Still, with it having remained relatively unchanged in the last week, this leads us to believe the market has stabilized at its bottom fear index.  Lastly, when compared to this time last year, it is below the 2020 pandemic driven score of 44 (just below neutral).  This further strengthens our believe that there is a stronger likelihood for greed movement post the current emotional consolidation.

Crypto Fear and Greed

The crypto fear and greed metric is more of a lagging, or reflective, indicator.  It gives good insight into the current state of the market, but because it reflects crypto pricing specifically, it isn’t as great at indicating future movement as the stock market version.  However, it could further strengthen your decision to hodl a bit longer, or let you know when to dip out and collect your gains.  Most importantly though, we use it to help time our re-entry into a coin or the market as a whole.

As mentioned, for the crypto fear and greed index, we use the Alternative.me version.  A detailed article can be found here, but to recap it:

  • When the market is rising, people tend to get greedy and have a Fear of Missing Out (FOMO)
  • When the market falls, fear takes over and people sell their coin as an irrational reaction to seeing red numbers.
  • Extreme fear can be a sign that investors are too worried, and it could be a buying opportunity.
  • Extreme greed could mean the market is due for a correction.
  • The 5-6 indicators are scored on a 0 (fear) to 100 (greed) basis and are not evenly weighted.
  • The chart is bitcoin specific since that currently drives the altcoin market as explained in our Tokenomics

So what are the 5-6 indicators and what are their weights?

  • Volatility (25 %) – Measuring the current volatility and max. drawdowns of bitcoin and compare it with the corresponding average values of the last 30 days and 90 days. An unusual rise in volatility is a sign of a fearful market.
  • Market Momentum/Volume (25%) – Measuring the current volume and market momentum (again in comparison with the last 30/90 day average values) and put those two values together. High buying volumes in a positive market on a daily basis could mean the market acts overly greedy / too bullish.
  • Social Media (15%) – While Alternative.me reddit sentiment analysis is still not in the live index (they are still experimenting some market-related key words in the text processing algorithm), their twitter analysis is running. There, they gather and count posts on various hashtags for each coin (publicly, they show only those for Bitcoin) and check how fast and how many interactions they receive in certain time frames).  An unusually high interaction rate results in a grown public interest in the coin and corresponds to a greedy market behavior.
  • Surveys (15%) – currently paused – Together with strawpoll.com (disclaimer: Alternative.me owns this site, too), quite a large public polling platform, they’re conducting weekly crypto polls and ask people how they see the market. Usually, they’re seeing 2,000 – 3,000 votes on each poll, so they do get a picture of the sentiment of a group of crypto investors.  They don’t give those results too much attention, but it was quite useful in the beginning of the studies.
  • Dominance (10%) – The dominance of a coin resembles the market cap share of the whole crypto market. A rise in Bitcoin dominance is caused by a fear of (and thus a reduction of) too speculative alt-coin investments since Bitcoin is becoming more and more the safe haven of crypto.  On the other side, when Bitcoin dominance shrinks, people are getting greedier by investing in riskier altcoins, dreaming of their chance in the next big bull run.
  • Trends (10%) – Alternative.me pulls Google Trends data for various Bitcoin related search queries and crunches those numbers, especially the change of search volumes as well as recommended other currently popular searches.
Crypto Fear and Greed

On the date of this article, 10/5/2021, the crypto fear and greed index is 59, so above neutral and in the greed category.  It was 54 the day before and 25 the week before, meaning it has been trending upward significantly this week.  However, if you look at it from a month ago, it was 73.  This means over the last 4 weeks there was a deep drop in market sentiment (going from 73 to 25) and then a recovery over the last week (going from 25 to 59).

Combining Stock Market Fear and Greed with Crypto Fear and Greed

So how do the two charts fit together?

When we look at the two versions of the index, the rising fear was reflected in both over the last month.  We also saw that while consolidation of fear was happening in the stock market version, the crypto fear and index had about 20% increased recovery.  It is also important to note that as a whole, crypto investors tend to be more aggressive than traditional stock market investors.  As such, when you see consolidation in the bottom end of the stock market index, it is likely you will see improved growth in the crypto fear and greed index.

Diving deeper, there is still a lot of room to grow on the greed side of the crypto fear and greed index, which means as soon as the fear consolidation ends on the stock market index, it would be a reflect an opportunity of growing crypto sentiment.

As long as the crypto fear and greed index is above 40-45, the overall crypto market sentiment is good (in our opinion).  Anywhere in the 65+ range the crypto market is in a strong position, and even if dominated by bitcoin, altcoins can still flourish.

So from our current day (10/5/02021) snapshot, we would feel comfortable adding to positions now or just hodling, and have felt that way over the last week.  Both charts support this (in our opinion). For any selling indicators, we would need the stock market fear and greed index to rise and start a downward trend again before we would consider engaging in any due diligence around crypto selling windows (as we only engage in top end selling, not bottom end).

In fact, both charts are in a strong enough position, that even if either or both dipped due to socially driven catalysts (such as news on the US Infrastructure Bill), we would still think this is a good range for adding as positive-side sentiment has a much larger window than short-side sentiment.  Of course, always do your own due diligence prior to making any investment decisions.

In Conclusion

Both the stock market and crypto fear and greed indexes are valuable tools in gauging overall market sentiment.  In fact, it is one of the primary factors in our own decision tree when analyzing buying and selling opportunities in the crypto space.  Hopefully, you found some value to this article, and it will help you in your own crypto journey.  If you have any questions, just let us know!

 

Helpful Information
  •  If you want to learn more about making money in crypto, check out Victory Crypto
  • If you want to learn more about beginner cryptocurrency trading lessons, check out Crypto Ultimatum

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