The crypto market is driven mainly by emotions. Greed pushes up the prices while fear causes prices to fall. Predicting human emotions in the crypto market is quite easy if you know what to look for. One investor who understands this well is Warren Buffet. He once advised people on how to take advantage of human emotions in the trading world.
The Fear and Greed index
Over the years, tools have been developed, such as this one, to predict the emotions of traders in the crypto market. The index predicts sentiment in the crypto market and is based on a scale of 0 to 100. At zero, it indicates there is a lot of fear in the market while 100 indicates traders are overwhelmed with greed. Below we can see an image of the current Fear and Greed Index.
Some Common Trends
When the index indicates extreme fear, this the first sign that extreme greed will follow soon. Each time the index gets close to 10, the index starts climbing soon after. This is usually the time when bargain hunters creep into the market and attempt to take advantage. Thus, the index can be a good sign of when there is both selling and buying pressures.
How to Use the Index
Each time the index gets close to extreme fear greed begins to creep into the market. In the past, the index has been quite accurate about predicting bull runs in the price of BTC. Historically speaking, the more fearful investors become, the more likely BTC will experience a bull run. Savvy investors know when to spot this and take full advantage of it. For instance, the index reached its lowest levels in December 2018 when BTC was trading around $3200. Soon after, the trend reversed and BTC went past the $10,000 mark in just a few weeks.
Data Points Used to Plot the Index
The crypto fear and greed index generally relies on these data points:
- Market Volumes
- Market Volatility
- BTC dominance
- Social Media
- Google Trends
The Index Has A Solid Track Record
The Greed and Fear Index is a good indicator of when the price of crypto and especially BTC has bottomed. It shows investors when the next Bull Run will most likely start. However, it cannot tell at which specific price the price of a crypto asset will turn upwards.
Experience traders in the crypto market have used this index with great effect. Will crypto assets such as Bitcoin experiencing higher volatility rates than traditional assets, this becomes an even more valuable tool for short-term traders.
In the past, this tool has proven to be quite accurate. Even newbies to the crypto market will find it to be a good estimate of the price trends of crypto. If you are new to crypto trading, you should definitely take time to understand how this tool works. Combined with a bit of experience, you should become more comfortable assessing the overall sentiment in the crypto space at a given time.
Image Source: Flickr