The CNN Fear and Greed Index is a tool that tracks seven indicators of investor sentiment, giving a score out of one hundred, where 0 registers extreme fear and 100 registers extreme greed. The argument goes that a greedier a market gets the closer it is to a correction as people take profit, with the reverse also being true. The Crypto Fear and Greed Index, which runs on the same principal, was created in February 2018 to gauge market sentiment along the same lines. With sixteen months of data behind it, let’s see how the algorithm compares to actual market activity.
Comparing With Price Action
The Crypto Fear and Greed index uses five sources to evaluate market sentiment:
- Market Volatility (25%)
- Market Momentum/Volume (25%)
- Social Media (15%)
- Surveys (15%)
- Bitcoin Dominance (10%)
- Google Trends (10%)
The data only goes back three months until the start of April, with the following chart depicting the fear and greed ratings:
This compares with the following Bitcoin price action during the same period:
This results in the following overlaid graph:
As we can see, there is a very strong correlation between Bitcoin’s price action and the amount of perceived fear and greed in the market. Of course, it’s impossible to tell whether fear and greed is a leading or lagging indicator given that it is only updated once a day, at midnight at the start of each day. Using the recent $13,900 top as a guide however, the price topped out late on the June 26, some 22 hours after the index had put the level at 95, suggesting that profit taking and a correction was imminent, which it was.
When Fear and greed index reach all time low around febuary 06 2018 when the Fear and Greed Index hit value 8 (extreme fear),. the price suddenly just shoot up almost 100 % within 1 month. today is value 95 new all time high (extreme greed). interesting. https://t.co/u9JlfMnrUS
— MisterCat (@SayMeowToMe) June 26, 2019
A Useful Tool
Given that the Fear and Greed Index covers price action as well as sentiment, it seems that it may well serve as another useful tool in an investor’s arsenal, particularly when determining whether local tops and bottoms are in. Similarly to the RSI, a value of over 80 and under 20 looks to be where potential signs of a reversal could be imminent and it may well be worth keeping an eye on the index value when it seems that the price action, and the sentiment, is growing or dropping significantly.