- September 25, 2019
- Posted by: Thms
- Category: Indicators, Ressources
Measure the temperature of a share on the stock market
The behavior of the crypto market is very emotional. People tend to be greedy when the market is on the rise, resulting in a FOMO (a form of social anxiety – a compulsive worry of missing an opportunity or a satisfying event, often prompted by publications on media sites social – “the fear of missing out“). In addition, people often sell their coins in the irrational reaction of seeing red numbers.
To understand how here are two easy assumptions:
- Extreme fear can be a sign of concern for investors. This could be a buying opportunity.
- When investors become too greedy, it means that the market needs to be corrected.
There are few factors included to compute the Fear and Greed Index:
Firstly, we pick up information about the market sentiment and secondly the social sentiment.
- Price / MA
- Implied Volatility (VIX)
- Simulated Price (using Geometric Brownian Motion)
- Google search trend
- News articles
This information is sorted and selected according to several percentages that are always the same.
- Volatility (25%)
We measure the current and max volatility. Bitcoin prints and compare it with the corresponding average values for the last 30 days and the last 90 days. We argue that an unusual increase in volatility is a sign of fear of the market.
- Market Momentum/Volume (25%)
The measure of the current volume and market momentum is added and putted those two values together. Generally, when we see high buying volumes in a positive market on a daily basis, we conclude that the market acts overly greedy / too bullish.
- Social Media (15%)
While the Reddit sentiment analysis is still not in the live index, the twitter analysis is running. There, we gather and count posts on various hashtags for each coin (publicly, only those for Bitcoin) and check how fast and how many interactions they receive in certain time frames). An unusual high interaction rate results in a grown public interest in the coin and in our eyes corresponds to greedy market behavior.
- Surveys (15%)
Together with strawpoll.com (disclaimer: we own this site, too), quite a large public polling platform, we’re conducting weekly crypto polls and ask people how they see the market. Usually, we’re seeing 2,000 – 3,000 votes on each poll, so we do get a picture of the sentiment of a group of crypto investors. We don’t give those results too much attention, but it was quite useful at the beginning of our studies. You can see some recent results here.
- Dominance (10%)
The dominance of a coin resembles the market cap share of the whole crypto market. Especially for Bitcoin, we think that a rise in Bitcoin dominance is caused by a fear of (and thus a reduction of) too speculative alt-coin investments since Bitcoin is becoming more and more the safe haven of crypto. On the other side, when Bitcoin dominance shrinks, people are getting more greedy by investing in more risky alt-coins, dreaming of their chance in the next big bull run. Anyhow, analyzing the dominance for a coin other than Bitcoin, you could argue the other way round, since more interest in an alt-coin may conclude a bullish/greedy behavior for that specific coin.
- Trends (10%)
We pull Google Trends data for various Bitcoin-related search queries and crunch those numbers, especially the change of search volumes as well as recommended other currently popular searches. For example, if you check Google Trends for “Bitcoin”, you can’t get much information from the search volume. But some time, you can see that there is currently a +1,000% rise of the query, bitcoin price manipulation“ in the box of related search queries. This is clearly a sign of fear in the market, and this can be used for the Fear and Greed Index.
For more information about the Fear and Greed Index, you should see this video.