What is Fear and Greed Index?

The Fear & Greed index essentially indicates how two human emotions – fear and greed – influence the crypto market dynamics. It goes from 0 to 100, where 0 represents "extreme fear" while 100 represents "extreme greed."

The original Fear and Greed index was created for the stock market by CNN Money. It was created to determine whether certain markets or commodities were trading above or below their alleged values out of greed or fear, respectively.

The factors used to determine the Fear and Greed index in the stock market include stock price momentum, stock price strength, trading volumes, put and call options, junk bond demand, volatility, and safe haven demand.

As for the Fear & Greed index in the crypto market, rather than relying on technical factors like most indicators do, it relies on psychology. Thus, the Fear and Greed index might indicate a fearful market even when the crypto market itself is relatively good based on its technical aspects. Besides, note that the Fear & Greed index does not reflect the prices of crypto assets.

There is a variety of indexes created for Bitcoin, Ethereum, and other big assets. So, if you're wondering what is Bitcoin Fear and Greed index, it is an index created to specifically measure the sentiment towards Bitcoin in the crypto market. Though, it's important to note that Fear and Greed indexes created based on Bitcoin (or other major crypto assets, for that matter) can also be used to indicate the sentiment of the whole crypto market.

Talking about factors that are used to calculate crypto Fear and Greed indexes, they might differ based on the index itself. The BitDegree crypto fear and greed index, for example, takes into consideration such aspects as market momentum / volume, volatility, trends, Bitcoin dominance, and different social signals. Most other crypto Fear and Greed indexes use the same indicators.

How to Use the Fear and Greed Index?

To understand how to use the Fear and Greed index, it's important to understand what fear and greed symbolize in the crypto market.

The "fear" part of the index goes from 0 to 50. When there is fear, traders rapidly sell off their crypto assets. Besides that, they become less sensitive to price drops. Thus, fearful markets are frequently viewed as a good buying opportunity.

The "greed" part of the index goes from 50 to 100. Greedy markets indicate that traders are overconfident in the price of an asset and are purchasing in large quantities. Therefore, markets that are overly greedy are typically seen as a good opportunity to sell.

So, the essence of using the Fear and Greed index is making decisions that are the opposite of the market sentiment.

Besides, it's useful to put the Fear and Greed index next to a price chart of an asset in question. It helps to predict upcoming price reversals. A price reversal almost always occurs right before the market sentiment reaches high fear, whereas a price crash almost always occurs right before the market sentiment reaches high greed.

However, always make sure to approach the Fear and Greed index, or other types of indicators, with caution. Also, it's beneficial to use more than one indicator before making any important decisions.