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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