Article

Introduction to the Fear and Greed Index

By CFX|10 April 2025

Understanding market psychology is no less important than fundamental and technical analysis. One popular tool for measuring such collective sentiment is the fear and greed index.

Want to delve deeper into the Fear and Greed Index and learn how to interpret it? Check the full article below:

What is the Fear and Greed Index?

The fear and greed index is an indicator that measures the sentiment of the crypto asset market being hit by fear or greed. This sentiment is quantified on a scale from 0 to 100. Lower values indicate a strong sense of fear, while higher values reflect a strong sense of greed.

Fear and Greed Index Calculation Method

Volatility. This measures the current price fluctuations of Bitcoin in comparison to its 30-day and 90-day moving averages. An unusual surge in volatility can signal a market gripped by fear.
Market Volume. This analyzes trading activity based on market volume and momentum over the past 30 and 90 days. High buying volume during a positive market trend can indicate an overly greedy market.
Social Media. Sentiment analysis is conducted on online discussions across various social media platforms.
Bitcoin Dominance. This compares Bitcoin’s market capitalization relative to the rest of the cryptocurrency market. Shifts in Bitcoin dominance can suggest changes in market participants’ risk appetite.
Trends. This involves analyzing various trending data related to Bitcoin sourced from Google Trends.

Function of the Fear and Greed Index

As a tool for assessing market conditions, the primary function of the Fear and Greed Index is to present investors with the dominant market sentiment. Based on this information, investors can utilize it for several purposes:

Identifying Trend Reversals. Extreme readings on the index, whether indicating extreme fear or extreme greed, can potentially signal an impending trend reversal. Extreme fear might suggest the market is nearing a bottom, while extreme greed could indicate an approaching market correction.
Measuring Market Cycles. Observing the Fear and Greed Index over time can provide insights into the current market cycle. Prolonged periods of greed may precede correction trends, while extended periods of fear could signal the beginning of upward trends.
Additional Analysis Tool. Although it cannot be used as a single indicator, the fear and greed index can be combined with other indicators as an analytical tool. For example, if the index is at greed or extreme greed, investors can be more careful not to make purchases.
Risk Management Strategy. The Fear and Greed Index can be valuable in developing effective risk management strategies. By knowing the level of greed or fear in the market, investors can make more rational decisions and avoid the Fear of Missing Out (FOMO) trap.

How to Read the Fear and Greed Index

The Fear and Greed Index scale is typically divided into the following ranges:

0 – 24 (Extreme Fear): The market is dominated by excessive fear. Prices may be nearing their lowest point, creating potential for an upward price movement.
25 – 49 (Fear): The market is characterized by doubt and caution. Prices are weakening and have the potential to continue declining or reverse.
51 – 74 (Greed): Enthusiasm is beginning to take hold of the market. Prices are strengthening and have the potential to continue rising or reverse.
75 – 100 (Extreme Greed): The market is filled with excessive euphoria. Prices may be nearing their peak, increasing the potential for a correction.

Tips for Using the Fear and Greed Index

As an analytical tool, the Fear and Greed Index is best utilized in conjunction with other forms of analysis. Here are some tips for incorporating it into your investment strategies:

Use it as a Contrarian Indicator. Consider the Fear and Greed Index as a contrarian signal. Extreme fear can sometimes indicate a market bottom, while extreme greed might suggest a market top. Always consider this in conjunction with other analyses.
Combine with Other Analyses. While the Fear and Greed Index can fluctuate rapidly, it doesn’t guarantee immediate price changes. Therefore, use it alongside chart analysis, volume indicators, and fundamental research.
Avoiding the FOMO Trap. The Fear and Greed Index can assist investors in avoiding the Fear Of Missing Out (FOMO). When the index indicates extreme greed, it is generally prudent to avoid making purchases driven by the fear of missing a trend. Conversely, periods of extreme fear can present opportunities to buy at potentially lower prices.