When anybody talks about money and investing, the immediate next thoughts are benefits, making more profits, and making better financial decisions.
However, there’s also a spectrum of investing that starts with benefits and ends with fear and greed.
The last few years have been really great for the crypto assets and the entire web 3.0 industry. With concerning market fluctuations and the rise in crypto millionaires, there’s a lot to anticipate before anybody decides to step into the crypto industry.
Not to mention that such a young industry also has a variety of anomalies associated with it, one of which is the crypto fear greed index, something we’re going to discuss in detail in this blog post.
The fear and misinformation associated with the crypto markets
There are three things in life nobody can avoid – Death, taxes, and fear.
Among these things, fear spreads like wildfire and causes more damage than anything else.
In the crypto world, the terms fear, uncertainty, and doubt (or FUD) are closely associated with misinformation about a certain asset.
So how does a normal mind react when misinformation spreads? It tries to disassociate itself from the entity there’s misinformation about. And what happens when you have invested your money into an asset there’s misinformation about? Your mind is clouded by fear and improper decision-making.
From market corrections to abnormal fluctuations, there could be a number of reasons for FUD in the crypto markets. A normal market correction may lower the value of a crypto asset, yet normal investors may start worrying that the asset is dead.
Especially since the Luna crash, there are a lot of reasons to be skeptical of the underperformance of a certain asset. That’s where a crypto fear and greed index comes in.
The crypto fear and greed index
Fear and greed together play a very important role for many investors to make investing and divesting decisions. However, to understand their impact together, we need to understand their impact individually.
Fear is the most dominating emotion where the market participants worry about their assets’ safety. When misinformation spreads across, a lot of investors pull the plug and withdraw their investments, even if they do it at a loss.
In addition, this factor significantly contributes to the collapse of the value of assets in the short term at least. This fear could also emerge from factors such as inflation, economic crises, or even geopolitical factors.
Greed, on the other hand, is such an emotion that drives an investor to make quick financial decisions with the hope of making potential gains.
When markets are treading upward, investors would want to hop on the bandwagon and make profits from the same trend. Greed works closely with FOMO and emotional investing, both of which could negatively impact your portfolio.
The fear and greed index together is a key market indicator that was developed by CNN Money. This index gives a statistical estimate of how human emotions like fear and greed affect the stock market.
The goal of the crypto fear greed index is to measure if certain markets are trading above their projected value because of the greed associated with them. On the other hand, it also calculates whether an asset is underperforming than normal because of the fear of the investors associated with it.
The fear and greed index crypto is presented as a spectrum that ranges from extreme fear to extreme greed, both of which are two unhealthy ends for a digital asset.
This spectrum relies on factors that sometimes aren’t exactly applicable to the crypto markets.
Usually, a crypto fear and greed index could use the following inputs to determine the sentiment of the current market:
- Price volatility over the past 1 and 3 months (25%)
- The volume of the market (25%)
- The momentum across social media and other channels (15%)
- The surveys of the community members (15%)
- Market dominance by the Bitcoin cap (10%)
- Google Trends data (10%)
The fear and greed index – Is it really worth it?
The presence of the fear greed index for crypto gives a slight clarity on the current crypto market conditions. However, this index alone isn’t enough to contribute to the decision-making for investing, holding, or withdrawing as well.
While this index allows us to understand the current market sentiment, it still doesn’t give you any kind of projections of how the market is going to perform in the future.
If you are a long-term investor and rely on the crypto fear or greed index (or are planning to), there are going to be more than enough instances when you may miss significant price rallies,
For a day trader, however, this index could also prove to be a very valuable tool as the current market sentiment could contribute to the decision-making of buying and selling in real time.
Even though this tool could be great for investors in many ways, individual investors need to make sure to do their very own research and watch how they buy and sell or where they gather the information from.
Conclusion
While an investing and divesting decision could be made because of a lot of factors, fear and greed are always very strong motivating factors for investors.
The fear and greed index in crypto could be used by investors to identify the different entry and exit points and construct strategies on the same. However, solely depending on the fear and greed index isn’t a healthy investing and divesting strategy at all.
What you also need to know is that every crypto transaction also invites taxes, which is why here at KoinX, we have created a very smooth mechanism for you to integrate with your favorite exchanges and calculate the taxes that your portfolio invites.
