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For beginners

The Fear and Greed Index – big moves coming for BTC

This is a great indicator for short term sentiment in the bitcoin market.

 

Warren Buffett famously said you should be ‘Fearful when others are greedy and greedy when others are fearful’. (He also said that Bitcoin is ‘rat poison squared’, but we don’t have to listen to everything he says.)

 

Anyway, he has a point. The herd is wrong when it comes to markets, and it’s the moments of maximum fear and panic-selling that are the best buying opportunities. There’s good reason for this: when everyone who is going to sell has sold, there’s no one left but buyers. Then a bunch of those who panic sold rush to buy back in when they see the price going higher… For the same reason, moments of maximum greed and exuberance are the time to sell – the bubble tops.

 

A while ago we published an article on the Cryptocurrency Fear and Greed Index. This index aims to capture the sentiment of the bitcoin markets. It takes several different indicators and rolls these into a single value, between 0 and 100. 0 represents extreme fear, while 100 represents extreme greed. The indicator takes into account bitcoin’s volatility, market momentum/volume, social media sentiment, survey data, Dominance and Google Trends data.

 

So why do we raise this again now? Well, the chart on the Index’s page shows that it has been extremely good at predicting tops and bottoms for bitcoin. In particular, a value above 70 is a strong sell signal, and below 10 is a strong buy signal. The data is remarkably accurate over the course of the last year – though it’s not available for before 2018, so it’s unclear how reliable it will be in a bull market.

 

Take a look at the chart. You’ll see that it recently hit 71 – its highest for over a year! Last time it went above 70, we saw a major sell-off.

 

Now, we don’t know the same will happen this time. Last year was a bear market, which is characterised by greater fear and a tendency for the Index to gravitate to lower values – when it did spike, the drop was hard. So maybe more greed is possible if the market is in an uptrend. But we would not be surprised if we saw another wave of fear grip BTC traders, with the Index heading down into the 20 zone and BTC back into the $4,000 region – or even below.

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7 tips for crypto beginners

New to crypto, or still learning the ropes? Here are some of our top tips to keep you safe and successful.

 

  1. Don’t keep funds on exchanges. You might not be able to avoid using exchanges for buying and trading, but don’t keep funds there for any longer than you have to. Crypto history is littered with examples of exchange hacks and losses, and if your coins are stolen, they’re gone forever. Withdraw your crypto.
  2. Back up your private keys. Similarly, there are too many stories of those who have lost crypto because their wallets were corrupted, lost or destroyed. Don’t be one of those people. Keep digital and/or physical copies of your wallets and private keys.
  3. Don’t trust Crypto Twitter. It’s full of trolls, shills and the terminally uninformed. In short, while you can find useful information here, you’ll have to wade through mounds of garbage to get it. You may never recover your sanity or perspective.
  4. Learn to ignore trolls. This is like the rest of the internet, on steroids. You’re going to meet unpleasant people who will look to cause division and offence for the sake of it. They don’t like being ignored. Ignore them.
  5. Learn to ignore shills. There are plenty of crypto folk who want to get you to buy a coin for their own gains. You’ll learn to recognise them. They’re typically narrow-minded and incapable of seeing the bigger picture. They don’t add anything valuable. Ignore them too.
  6. Cost average. Unless you’re a legendary trader, don’t expect to call tops or bottoms of the market. Never go all in, and never go all out. The price can rise or fall more than you ever thought possible. There’s a time for making decisive moves, but if you make a decision in a hurry, it’s disproportionately likely to be a bad one. Save some dry powder for the unexpected, to average down your buy price or average up your sell price – if it comes to it.
  7. HODL. For the same reason, whatever else you do and whatever trades you make, HODL a few coins. Accumulate some crypto and then put some of it aside for the long-term. Forget about it and come back to it in two to five years. Future you will very likely thank past you for doing it.

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Network Value to Metcalfe (NVM) ratio

In a previous article, we looked at NVT, the Network Value to Transactions ratio, which is a basic way of valuing a crypto network.

 

NVT is simply the overall market cap of a crypto divided by the volume of transactions that take place on its blockchain. The thinking is pretty straightforward: more valuable blockchains should see more transactions. Comparing NVT for different cryptos, you should be able to see which are under- or over-valued. And changes in NVT do broadly correlate with price inflections.

 

But it’s not a particularly sophisticated metric, and doesn’t account for a lot of important factors (a spam attack, for example, sees a lot of transactions on the blockchain, but doesn’t reflect underlying value). A more nuanced approach is NVM, or Network Value to Metcalfe ratio.

 

NVM is not nearly so simple as NVT to grasp, but it turns out it’s quite good at predicting when bitcoin is over- or under-valued. Robert Metcalfe was an early Xerox PARC employee, and came up with the principle that the value of a network is proportional to the square of its nodes or users. So a telephone system with 200 users is four times as valuable as one with 100 members – not twice as valuable, as you might first think. This is why bitcoin is so valuable: its network is that much larger than any altcoin’s network, and the impact of that difference is squared.

 

Taking different implementations of Metcalfe’s law, Cryptolab Capital has come up with a model that works surprisingly well. Read the article in full for a proper overview, but the take-home message is that a rise in value should be accompanied by a rise in Daily Active Addresses – if not, price may be getting ahead of ‘real’ value (i.e. a bubble).

 

This may all change with the introduction of proper custodial services and exchange-traded products, but in the immediate future it’s another useful tool to add to the crypto investors kit.

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The Fear and Greed Index

Look at a bitcoin price chart. What do you see?

Red candles, green candles, volume bars?

Perhaps you’ve trained yourself in TA and you can see the patterns behind the bars. Support, resistance. Trends, ranges.

Or just maybe you see between the lines, the music behind the words. Greed. Elation. Caution. Panic.

Ultimately, a market is the reflection of all of its traders’ decisions, and many of those decisions are driven by emotion – particularly in a market like bitcoin, where institutional players are still just starting to come in.

That’s why Sentiment Analysis is an important tool, alongside Fundamental Analysis and Technical Analysis. What’s the market’s approach to this right now? Are they confident, fearful, interested, averse?

Take a look at The Fear and Greed Index: an analysis of emotion and sentiment taken from different sources and consolidated into a single figure. Zero means Extreme Fear. 100 represents Extreme Greed. You’ll see from the Crypto Fear and Greed Index that fear tends to correlate with buying opportunities, and greed with selling opportunities. It uses volume and volatility, social media and survey data, as well as bitcoin dominance and data from Google Trends.

It’s not a perfect measure, but it’s another useful tool for the smart bitcoiner’s toolkit.

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