THREAD: Don’t get burned by trading the Crypto Crypto Fear & Greed Index

I have seen this index popping up on my timeline multiple times in the last few weeks, but the posts I’m seeing are mostly about counter trading this indicator.

These posts come from the “Buy the blood” or “Disbelieve phase” attitude, while I see most don’t understand this indicator in these circumstances. As always, it is all about interpreting the data.

The data and screenshots below are from the Fear & Greed Index website. I will start with explaining what data is used to create this index. https://alternative.me/crypto/fear-and-greed-index/

The volatility in the market accounts for 25% of the value in the index. This is purely price based and if volatility gets higher, the assumption is that high volatility is an indication for fear.

The share of momentum/volume is also 25%. Plainly said: 50% of this index is measuring the price movements in the market.

Momentum can be a good measure, but if you have the assumption to counter trade this index you could be counter trading the trend. Would you short a heavily up trending market? Why would you long a heavily down trending market?

During big drops like this in a short period of time the Index will probably signal a very fearful sentiment, just because selling pressure was high.

Since the indicator is branded as a Multifactorial Crypto Market Sentiment Analysis most users think this indicator is based on sentiment analysis from text, posts, tweets, etc. Only 40% of this type of data that contributes to this indicator.

The Social Media (15%) analysis takes only Twitter into account at the moment. This can be a very sentimental bunch of people who trying to engage with a community. These interactions can provoke some extreme emotions or reactions.

The Surveys (15%) are based on 4 questions about the crypto market. The survey gets 2000-3000 responses every week but does not balance the different types of investors/traders, the size of the portfolio or experience in a market.

This makes the sample group very biased and hard to compare overtime. A measure like this is very unreliable.

If you want to take a look at these questions. You can do that here.

https://alternative.me/crypto/sentiment/#results

10% from the data comes from Google trends which is based on Google search data. Leveraging data like this to measure the sentiment can be a good method, but at this moment I’m not sure what specific queries get used for this.

Some queries probably are influencing the index more then others. Example: 'bitcoin price manipulation' searches can indicate fear in a market, but if more people are interested in crypto this number might go up, while it is just the increase of interest in general and not fear.

Dominance data is at 10%. As they mention dominance increase can be both bearish and bullish for Bitcoin. They also mention that a rise in dominance causes fear. These statements seem contradicting.

I think this data source can only be trustworthy if you combine it with BTC movements, which they already do with 50% of the index.

The indicator itself is now at 11, a fairly low value and it signals extreme fear. With the Corona Crisis going on, I'm not surprised by this number, since these uncertain times can invoke fear in many.

Actions and opinions in a market are influenced by that. BTC is behaving like a risk asset at the moment and we can see that in the chart and in the correlation with the SP500.

In general, the trend of the index is down. It seems that the overall sentiment in the market has declined in the past few months. The crypto market is less driven by greedy sentiments, which could be because of less extreme high time frame trends in Bitcoin.

It is not weird that this index is correlating with the price of BTC, since 50% of the index data comes from the price itself.

To conclude, I’m not against using this index in trading the crypto markets, but I am a supporter of understanding the data you base your decisions on. Using a valid instrument with reliable data is essential for making good decisions.

Misinterpreting data can give you the false conclusion when you make a decision. In heavily trending markets this index is influenced by past price movements and can be used to view a trend. Counter trading this indicator is the worse choice and it is better to follow the trend.

I think this Index can give some information, but I would not trade on that. For example, if the indicator signals Fear in a bullish market it might be time to buy the dip, since sentiment is not in line with the price action.

However, during times like these the Index signals Fear in a down trending market. A good indication you have to be careful trading these markets and risk is higher then usually.

Stay safe, trade safe!