The Crypto Fear and Greed Index or CFGI indicator, as it is known by its acronym in English, is a market sentiment indicator, which offers a metric of the emotional state of the market. The idea behind this indicator is very simple: show operator or trader of cryptocurrencies, the general emotional state of the market, in order to detect moments of fear, greed or apathy reflected in market movements.
Detecting emotional states with market data
But how can emotional states be detected using market data? Is that possible? As difficult as it may seem, it is possible to do it, since our decisions are highly influenced at all times by our emotions.
Remember the popular saying that says: Never make important decisions while angry and much less euphoric / happy. Well, behind that saying there is an undeniable truth, and that is that when we are angry we tend to make impulsive decisions, without a good analysis and very possibly wrong, which leads us to very complex moments. If you make decisions in that state at work, you will make serious mistakes, and the same is true in the stock market: you will possibly be wrong, and in the worst possible way.
This is due to the fact that our thought process is influenced by psychological states, and with this it is seen reduced our analytical capacity and decision making.
This is the foundation on which the Crypto Fear and Greed Index or CFGI indicator is built. By studying factors such as market volatility, momentum (accentuated buying and selling spaces), activity in social networks or the media, surveys and market trends, it is possible to extrapolate sufficient information to detect the global emotional state of traders.
Securities considered within the Crypto Fear and Greed Index
Like any indicator, the Crypto Fear and Greed Index (CFGI) takes a series of data to transform it into useful information for the user. In this case, CFGI generally takes the following parameters:
market volatility
The volatility is used to measure the maximum, minimum and average rise and fall of the value of a cryptocurrency, so you can create a history of these values at desired time intervals (7, 15, 30, 60, 90, 180, or 365 days).
The goal is to recognize the meaning of volatility and know the emotional state it represents:
- If volatility is unstable, this is a sign of a fearful and indecisive market.
- Conversely, if volatility is stable or decreasing, it is a sign of a market with a high degree of confidence.
Momentum or Market Volume
Like volatility, market momentum or volume is also closely tracked. The idea is to detect when the market volume grows (signal of strong purchase and decision) or falls (signal of fear).
Of course, momentum also tells traders if we are facing a bear market or oversold, or facing bull market or overbought.
activity in networks
Another source of data for the Crypto Fear and Greed Index is network activity. Tracking the behavior of communities in social networks and other news spaces is a good idea if what you want to know is the general state of said communities and their predisposition to participate in the purchase and sale of cryptocurrencies.
Of course, this is a piece of information that must be analyzed very precisely, since it can give rise to erroneous signals, since the communities can prepare schemes of pump&dump to artificially raise the value of a token/cryptocurrency and create a pool of data that does not correspond to reality.
Dominance
The dominance of a cryptocurrency/token is another relevant value to obtain the Crypto Fear and Greed Index. It's about the capitalization or presence that has said cryptocurrency/token within the general market.
Variation of dominance helps us to know if there is fear or euphoria for it, and if the impact of said cryptocurrency/token is relevant in the general market, we will see how the rest of the cryptocurrencies/token follow the marked trend.
This value and its behavior is easy to identify in Bitcoin. When Bitcoin's dominance increases, the general state of cryptocurrency markets starts to grow, while if it goes down, the opposite happens. Hence, the falls and rises of BTC have a high impact on the valuation of the rest of cryptocurrencies/tokens.
Search trends
For their part, search trends are related to the increase or decrease in the search for information about cryptocurrencies in search engines like Google.
When people start to search massively for information about cryptocurrencies, it is due to the rebound in its valuation or looking for information about some shocking event. While the low search episodes are related to disinterest in the sector. This can also be used to build the Crypto Fear and Greed Index.
This is another factor that must be read very carefully, because a rebound can be positive or negative depending on the information sought. If, for example, you are looking for information about NFTs or forms of savings in cryptocurrencies, it is very likely that this is due to a rebound in value of said assets. If, on the contrary, the rebound is due to hacks or the fall of a platform, it is most likely that the value of cryptocurrencies will be negatively affected and this generates fear.
Some known Crypto Fear and Greed Index indicators
There are currently many Crypto Fear and Greed Index platforms deployed on the Internet offering information on the general sentiment of the cryptocurrency market. Some of these are:
As you can see there are several, but you must take into account the following: each measures the Crypto Fear and Greed Index differently. Of the aforementioned factors, each weighs them differently, and as a result, the CFGI value may vary from one platform to another.
Keep this in mind, in order to take this data as something useful for your operation as a trader, so you will know what to expect in each case and read the information provided by this indicator more reliably.