Crypto Fear and Greed Index predicts ‘extremely greedy’ market in 2024

The Crypto Fear and Greed Index tracks the shift in market sentiment.
Ahead of a potential BTC ETF approval, the index shows greed in the market.

While carefully researched analysis guides the decisions of market participants in the crypto world, fear and greed often hold the reins of investors’ actions.

Understanding and managing these emotions is essential to navigating this ever-volatile market with any measure of success.

Although one cannot accurately predict future price movements of crypto-assets, tools such as the Fear and Greed Index provide valuable insights for making informed decisions.

What is the Crypto Fear and Greed Index?

Fluctuations in an asset’s price are due to shifts in either fear or greed within the market. The market is said to be greedy when there is increased demand, which consequently drives up an asset’s value.

Conversely, an increase in fear manifests in decreased demand and price. This may present an opportunity to acquire more of an asset.

Enter the Crypto Fear and Greed Index, a tool developed by Alternatives.meWhich acts as a sentiment gauge, measuring the overall emotions driving the crypto market.

The index generates a number on a scale of 0 to 100, with a value of 1 indicating that the crypto market is in a state of extreme fear. Extreme fear indicates a trend of selling among investors, putting downward pressure on an asset’s value.

Conversely, a value of 100 indicates an extreme level of greed, indicating a prevalence of buying behavior.

Following a simple rule, investors often resort to panic selling during market downturns, which signals fear and causes an asset’s value to fall.

Conversely, during market upswings, there is an increased tendency to accumulate cryptocurrencies, showing increased greed and resulting in significant price movements.

The different index levels

Here is a breakdown of the various index levels and their associated market sentiment within the Crypto Fear and Greed Index:

0-24

When the index falls within the range of 0-24, the market is said to be in a state of fear. During this period, investors become extremely cautious, with most choosing to sell their holdings to mitigate potential losses.

The period is also characterized by a decrease in trading volume, as market participants watch from the sidelines and refuse to hold any trading positions. This level often indicates the possibility of further price declines due to increased selling pressure.

It was the case on August 22, 2019, when the index fell to a mere 5 out of 100, indicating a state of extreme fear in the market.

The plunge coincided with escalating trade tensions between the US and China, which culminated in a 10% tariff on Chinese goods. This resulted in a 16% decrease in Bitcoins [BTC] price, which has been rising for months.

During the March 2020 COVID-19 pandemic, the Fear and Greed Index dropped to a near-fatal 8 out of 100 on March 28. In the two days that followed, BTC’s price lost more than half of its value.

Again, in November 2022, after the unexpected collapse of cryptocurrency exchange FTXthe Crypto Fear and Greed Index returned a value of 12, coinciding with BTC’s price drop to a two-month low.

However, this range can also provide buying opportunities for those with a long-term investment horizon, as asset prices may be undervalued.

25-49

Another range is the 25-49 level. Although fear still remains in the market within this range, investors are gradually becoming optimistic.

While market participants remain largely uncertain, they engage in less risky trading strategies within this range instead of staying away entirely.

An asset’s price will typically experience range-bound price movements at this index level. Opportunities for short-term profits can also arise if prices fluctuate.

50-74

At the 50-74 index level, optimism and excitement take center stage, causing a surge in buying momentum. Trading volume may increase as investors embrace more aggressive strategies.

This level often sees rapid price increases as demand exceeds supply. However, as buying pressure builds to unsustainable levels, the range risks forming a market bubble.

75-100

The market is said to be in a state of extreme greed when the index ranges from 75-100. The period is typically characterized by euphoria as investors become overconfident and make trading decisions driven by fear of missing out (FOMO).

Although the increase in accumulation can increase the asset’s value, the market becomes highly vulnerable to corrections or crashes as unsustainable price levels are reached.

For example, on the 31st of December 2020, the fear and greed index ended the year with a value of 95. Ten days later, BTC’s price skyrocketed from $16,000 to $40,000, culminating in the first ever Bitcoin high of $40,256 on January 10, 2021.

By February 14, 2021, the index had risen again to 95. It coincided with a pull together in BTC’s price from $39,000 to an instantaneous high of $56,000 within two weeks.

How are these indexes generated?

The Fear and Greed Index collects data from five sources to determine the sentiment change in the crypto market.

Volatility: The index tracks the current volatility and the maximum withdrawals and compares it to the 30-day and 90-day average volatility and withdrawal numbers. When volatility rises, the market is said to be fearful.
Momentum and volume: The index also measures current market momentum and volume and compares them to their last 30/90-day averages. High daily buying volumes in a positive market indicate overly greedy or bullish market behavior.
Social Media: The index tracks mentions and hashtags for crypto-assets and compares them to historical averages. When there are higher mentions and hashtags, it represents an increase in market engagement. Dominance: The index measures BTC dominance in the overall market. When BTC predominance rises, the market is considered scared. Conversely, sentiment is interpreted as changing when altcoins begin to see an increase in market share.
Trends: According to Alternative.me, analyzing changes in search volumes and currently popular searches helps market sentiment. When the search interest in a cryptocurrency increases, greed in the market is also considered to increase.

Greed permeates the market ahead of a potential BTC Spot ETF approval

At press time, the Crypto Fear and Greed Index reflected a value of 71, depicting that market sentiment was greed. This is due to the positive sentiment surrounding a potential BTC spot ETF approval.

Source: Alternative.me

All spot ETF applicants have made final filings, and many expect a decision from the US Securities and Exchange Commission this week.

In a recent post on X (formerly Twitter), Bloomberg ETF analyst Eric Balchunas said that the chances of the regulator rejecting the applications before that have dropped from 10% to just 5%.

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Well said, although I’d probably go with 5% at this point. But you have to leave a little window open for these things.

— Eric Balchunas (@EricBalchunas) January 6, 2024

Read Bitcoins [BTC] Price Forecast 2024-2025

If the regulator approves the applications, one can expect the Crypto Fear and Greed Index to slide into extreme greed territory as many expect a surge in BTC’s value once approval is given.

However, the market can become overheated, resulting in a downside; therefore, caution is advised.