Fear & Greed as Engines of the Crypto Market

    04 Sep 2021

    The fear of missing out on excess profits is one of the most powerful engines of the crypto market, no matter what they say about the practical economic use of blockchain. Therefore, the correct application of the “Fear & Greed Index” allows you to read the market mood, and understanding FOMO lets you build out the crypto project architecture.

    The crypto world’s entire history can be divided into “before” and “after” 2017. It was then that regular consumers, for the first time, recognized that a lot of money could be made on cryptocurrencies (and on blockchain technologies in general). Unsurprisingly, that was also the year the slang word “X”, which stands for a multifold increase in invested capital, became widely used.

    The unusually high volatility of cryptocurrencies (and now DeFi projects as well) has been caused by a well-known psychological phenomenon called fear of missing out (FOMO) ever since that point. The ubiquity of smartphones and mobile Internet access allows a person to stay in touch at any time but simultaneously time cultivates anxiety over missed opportunities. Many of us have probably seen this happen to our friends and acquaintances. For example, a person could buy some XRP – and that’s it, they lose their peace and check stock reports every 15 minutes, afraid of missing the pump. And, XRP is not even the worst possible case – imagine buying some shitcoin… What happens then is a pure nightmare.

    Even professional traders are sometimes subject to FOMO, let alone laymen. Lots of people are familiar with FOMO symptoms in crypto finance:

    – a person always closely watches the rates of cryptocurrency assets;

    – they are afraid of missing important news that may lead to an increase in an asset price;

    – they use their smartphone to constantly monitor the assets;

    – they are afraid to at any point be left without Internet connection;

    – they get upset about missing on some crypto asset before it goes up in price.

    Without exaggeration, the cryptocurrency market in its current form simply would not exist if it weren’t for FOMO. Still, it is worth looking at a broader picture – the FOMO-FUD cycle, also known as the “Fear & Greed Cycle”. (FUD is an acronym for fear, uncertainty, and doubt).

    The FOMO-FUD cycle is, of course, a fascinating research topic for a variety of fields, from psychology to economics (which are more closely related than was commonly thought). But for traders, it has serious material consequences. Therefore, they should be indifferent not only to cryptocurrency market sensations but also to skepticism.

    Even such vague categories as fear and greed were eventually measured, which is how we got the Fear & Greed Index – an excellent tool for market analysis. Initially, the index was introduced by CNNMoney: they used it to assess prevailing moods in the stock market and see whether the quotations trended towards an increase or a decrease. Later, the Fear & Greed Index was also adapted for the cryptocurrency market.

    The index is interesting mainly because it takes into account the ratio between two primary emotions of market investors – fear and greed – using several quite measurable market indicators.

    Speaking specifically about bitcoin and the cryptocurrency market, the Fear & Greed Index ranges from 0 (maximum fear) to 100 (maximum greed). In its visual display, the graph and the slider are divided into the following zones:

         0-24 = Extreme Fear

         25 – 49 = Fear

         50 – 74 = Greed

         75-100 = Extreme Greed

    The Fear & Greed Index for BTC and other cryptocurrencies is updated every 8 hours. It is calculated based on six different criteria. Each criterion is assigned its own “weighting factor” (as a percentage), which reflects its importance in assessing market sentiment.

    Volatility (25%)

    The current volatility and maximum drawdowns of BTC are measured and compared with the corresponding averages for the last 30 and 90 days. An unusual spike in volatility is a sign of a “fear” market.

    Market Momentum/Breadth (25%)

    The current market momentum and breadth are measured (again compared to the averages over the last 30/90 days), then the two values are correlated. Usually, if the market experiences high daily buying volumes against the background of favorable market conditions, it is a sign of excessive greed (“bull” behavior) on the part of the market players.

    Social Networks (15%)

    Currently determined through Twitter analysis. Messages with different hashtags for each coin are collected and counted, then the quickness and strength of the response are analyzed. The unusually strong reaction leads to an increased public interest in the currency, thereby reflecting the market players’ greed.

    Surveys (15%)

    The Fear & Greed Index authors conduct weekly surveys to find out how people perceive the current market situation. Two to three thousand people participate in each survey, giving the organizers an idea of crypto investors’ mood.

    Dominance (10%)

    Coin dominance is determined by this coin’s share in the total market capitalization of cryptocurrencies. The rise in Bitcoin dominance is usually associated with the fear of highly speculative investments in altcoins. Conversely, when the dominance of BTC decreases, it means that people are becoming excessively greedy, wanting to participate in a new large-scale “bull” rally. Any altcoin rising in dominance causes more interest around it and can lead to a “bull” trend for this particular coin.

    Trends (10%)

    Google Trends data analysis for various crypto-related search queries. Particular attention is paid to changes in the volume of search queries, as well as recommended and popular queries at the moment. For example, if the query “Bitcoin price manipulation” grows, it is a clear sign of a “fear” market, which is reflected in the index score.

    The fact that psychological factors were expressed through real, measurable numbers is a remarkable achievement in the field of cryptanalytics. Still, every professional should have their own “secret” index so as not to depend on someone else’s opinion at all times.

    Leave a Reply

    Your email address will not be published. Required fields are marked *