How to measure the mood of the crypto market: understanding the Fear and Greed Index

Emotions play a crucial role in traders’ financial decisions despite the need for objective analysis. Market professionals have long understood that fear and greed are the two main driving factors that determine cryptocurrency prices and trading volumes. To measure these psychological states, a special indicator was developed to help capture the overall market sentiment.

The essence of the tool

The Fear and Greed Index is a tool that evaluates the psychological state of crypto market participants daily on a scale from 0 to 100. A zero value symbolizes maximum fear, while a hundred indicates extreme greed. When the indicator approaches zero, traders are in a panic and actively selling assets. When the value is close to 100, the market is overbought, buyers act impulsively, expecting endless price growth.

Popular portal Alternative.me updates this indicator daily, providing current information about market sentiment. The tool analyzes data on volatility, social media activity, market impulse, and Bitcoin dominance, creating a comprehensive picture of participants’ emotional state.

Where the idea came from

Financial analysts have long known that emotions influence trading. Experts noticed that when traders are willing to overpay for assets, it is a clear sign of a bullish trend that has turned into speculation. Conversely, reluctance to buy during price declines indicates panic selling.

Based on this understanding, the first version of the index for assessing market sentiment was created. The concept proved to be so effective that it was adapted for the cryptocurrency space. Now, the tool helps traders determine whether the market is at the peak of a bubble or at the bottom, where conditions are suitable for entry.

What components make up the index

Volatility (25%)

Bitcoin price fluctuations are the main indicator of fear in the market. The indicator compares current volatility with average values over 30 and 90 days. Sharp price jumps typically indicate panic or excitement. A smooth and steady increase, on the other hand, points to healthy participant sentiment.

Impulse and volumes (25%)

Price movement is important but only in conjunction with trading volume. High volumes during price increases indicate active buyer interest — a sign of greed. Decreasing volumes during price drops suggest traders are reluctant to sell, characteristic of periods of intense fear.

Social media activity (15%)

Platforms like X and Reddit have become places where traders share advice and forecasts. High activity of Bitcoin mentions, likes, and reposts correlates with overall market optimism. When people actively discuss cryptocurrencies, it often signals a greed peak. A decline in activity may indicate disappointment and fear.

Surveys and research (15%)

The portal regularly conducts surveys among 2000-3000 users. Participants are asked about the current market state, their expectations, and emotions. The results are compiled into a single indicator that is updated weekly.

Bitcoin dominance (10%)

When Bitcoin accounts for more than 70% of the total crypto market capitalization, it indicates traders’ desire for safety and a risk-avoidance attitude — a typical sign of fear. During periods when Bitcoin dominance decreases, traders are more actively buying altcoins in hopes of higher profits — a sign of growing greed.

Google search trends (10%)

The number of queries about how to buy Bitcoin usually increases before market peaks. Queries like “how to make money on Bitcoin” or “best altcoins” indicate greed peaks. Searches like “how to short Bitcoin” or “will there be a crypto crash” are typical during periods of fear.

How to use this tool in trading

When the index shows a value below 30 (extreme fear), the market is often at the bottom. Experienced traders use such moments to enter positions at attractive prices. This is when most participants are fleeing the market, but assets purchased often grow in price over the next few weeks or months.

At values above 70 (extreme greed), the market is usually overbought. Prices have been rising for so long that any disappointment can trigger a correction. During such periods, caution or even profit-taking on existing positions is recommended.

Values from 40 to 60 are considered neutral. The market is in balance, supply and demand are roughly equal. During these periods, the index is less useful — other analysis tools should be relied upon.

Limitations of the tool

Despite its usefulness, the index has significant drawbacks. It is mainly oriented toward short-term trends and is not suitable for long-term investors. During multi-month bullish or bearish markets, the index can give contradictory signals, fluctuating between fear and greed, making it difficult to determine entry points.

The tool ignores the state of altcoins and Ethereum. If most assets in the market, besides Bitcoin, are rising, the index may not reflect this, relying solely on Bitcoin dominance.

Another critical blind spot is the periods after Bitcoin halving. For several months after this event, a significant price increase has historically been observed, but the index may underestimate such potential, showing moderate values.

Why you should not rely solely on this index

The Fear and Greed Index is just one of many lenses through which to view the market. Using it in isolation from other analysis methods is risky and can lead to losses.

For comprehensive analysis, this indicator should be combined with technical analysis, fundamental project research, chart analysis, and long-term trends. Short-term traders can benefit from this tool, but long-term investors should pay more attention to the project’s technology, development team, and actual network usage.

Each trader must decide for themselves whether this tool suits their trading decisions. Before using it, conduct your own research and ensure that the method aligns with your trading strategy and goals.

Key takeaways

The Fear and Greed Index is a dynamic tool that reflects market psychology through analysis of volatility, social activity, impulse, and other parameters. It works best for short-term traders and is especially useful during periods of extreme emotions.

However, it is not recommended to rely on it as the sole trading signal. The tool should be used as part of a broader analytical toolkit. Traders who combine this index with their own research, technical analysis, and fundamental asset evaluation make more informed decisions and reduce the risk of losses.

Remember: the crypto market is complex, and successful trading requires discipline, patience, and continuous learning.