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The Fear & Greed Index Explained

The Fear & Greed Index Explained

Crypto Technical Analysis

29 Sep 2021


Since 2018, the cryptocurrency market has seen a range of ‘new indicators’. These are indicators which are not used in traditional financial analysis.

An example of a traditional indicator is the Williams Alligator Indicator (WAI). The emergence of on-chain analysis, courtesy of organisations such as Glassnode and social analysis from LunarCrush, has allowed investors to view the market in a new light. One of these new cryptocurrency indicators is the Fear & Greed Index (FGI).

fear and greed index
Figure One - FGI - 06/11/2020

What is the Fear & Greed Index (FGI)?

The FGI analyzes the emotions and sentiments of a cryptocurrency. Analysis conducted gives a number out of 100, demonstrating the overall sentiment / emotions currently present. Data for the fear and greed index (FGI) is collected from the following sources:

  • Volatility
    • High or low?
  • Market momentum / volume
    • Measured against 30 / 90 day average
  • Social media
    • Reddit & Twitter analysis.
  • Surveys
    • Currently paused
  • Dominance
    • BTC.D / alt dominance / ETH.D
  • Trends
    • Google Trends

The analysis conducted by Alternative (FGI creators) spreads the data according to the figure below.

FGI fear greed index data input composition
FGI Data Input Composition

The FGI Range

As stated earlier, the FGI works within a range of 0 - 100. The higher the value, the more greed is present. The lower the value, the more fear is present. Overall there are five FGI states:

  • Extreme greed
  • Greed
  • Neutral
  • Fear
  • Extreme fear

At time of writing, cryptocurrency market sentiment around Bitcoin translates to a state of extreme fear, as shown in the figure below.

Fear and greed index chart-extreme fear
Figure three - current Bitcoin FGI state

Why Does The FGI Matter?

With social media algorithms ever present and search engine data collection / utilization, it can be difficult to accurately gauge the current market sentiment. For example, if a user was on ‘Solana Twitter’, widespread euphoria on the social media platform in recent months would give the impression that the cryptocurrency market is in a state of extreme greed. This would be due to numerous successful Solana Initial DEX Offerings (IDOs) and substantial positive price action in recent months.

Solana-major positive price action
Figure four - Solana has seen major positive price action since the start of 2021

However, if a user was on ‘EOS Twitter,’ the overall market sentiment would likely be significantly more downbeat. This would likely be due to EOS underperforming in comparison to the majority of the cryptocurrency market, with EOS below early 2020 levels.

EOS-lack of interest over the past 18 months
Figure five - EOS has seen a lack of interest over the past 18 months

Through using the Fear & Greed Index, one can accurately judge the fear and greed of the cryptocurrency market. Although the FGI revolves around Bitcoin, the market typically follows BTC, with altcoins exaggerating BTC movements according to current interest.

How to Utilize the Fear and Greed Index (FGI)

According to Alternative, extreme fear presents prime buying opportunity while extreme greed suggests that the market is ready for a correction.

However, AAX analyst Oliver Page has recognized that the cryptocurrency market can experience prolonged periods of extreme fear and extreme greed. During these periods (similar to RSI zones), the FGI moves within a range.

For example, between 06/11/2020 - 15/01/2021, the Fear & Greed Index for BTC illustrated support at the 82 FGI level & resistance at the 95 level. This was an ‘extreme greed run’.

fgi values
Fear and Greed Index (FGI) values over the past 12 months

Upon breaking the 82 FGI level, BTC subsequently witnessed a major correction, falling from $39K to $28.5K USD.

BTC/USDT chart
Figure seven - BTC / USDT chart

As well as having periods of extreme greed, BTC can also have prolonged periods of extreme fear.

For example, between mid-May to late July, BTC was stuck within the 30 - 10 FGI zone. Throughout this time, BTC saw continued negative price action.

BTC/USD price chart
Figure eight - BTC / USD chart

Upon breaking the 30 FGI resistance, BTC saw a resurgence, ending the continued price action rot which dragged BTC down from $55K to $29K USD. BTC surged from $29K to $52K, with both BTC and altcoins seeing significant positive price actions, especially in the case of LUNA token.

How to Use the Fear and Greed Index (FGI) - Conclusion

Users of the FGI need to recognize that waves of fear and greed are seen, rather than spikes. Selling when the cryptocurrency market enters a state of extreme fear could result in a user missing an exponential bullish run. Similarly, if a user buys when the market enters extreme fear, the user could easily get caught in a hyperbolic degradation of cryptocurrencies' value. Instead, what users should do instead is use the Fear & Greed Index to look at sentiment resistance and support breaks. This will allow users to see the incoming sentiment shift across the market.

FGI Conclusion

The FGI allows users to effectively see the current sentiment of a market. However, it is misused by many social media cryptocurrency influencers. To their detriment, users allow their emotions to be manipulated by FGI posts (influencers attempting to draw likes, for example). What users should do instead is zoom out, evaluate the macro FGI trend, and attempt to position themselves accordingly alongside other market analyses. Like all indicators, the Fear & Greed Index should not be used by itself.

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