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There are three primary drivers behind any type of market where trading occurs. Whether stocks, bonds, precious metals, commodities, or cryptocurrencies -- they're all impacted by the following three factors:
Fundamentals
These are the macroeconomic conditions in which the market exists that provide shape and context for that market. The conditions are dynamic and can change quickly or slowly over time. Examples include elections, wars, natural disasters, and economic factors such as inflation, reckless government spending, runaway money printing and more.
Technicals
Markets are made up of people, and people are creatures of habit. As each of us engage in the behaviors of buying, selling, and holding assets individually, larger behavioral patterns form on an aggregated scale that reflect those collective actions. While no one can predict the future market movements perfectly, these technical patterns can inform decisions about what's likely to happen next, providing a reasonable course of action to take with a high probability of success.
Sentiment
Not only are people creatures of habit, we're creatures of emotion. Arguably, very few people have the discipline and will to buy, sell, and hold in a market based solely on logic. People tend to rely on their "gut instincts" or pure emotions. Anyone who doubts the role that emotions play in markets and decision-making need only recall this quote by famous economist John Maynard Keynes, "The markets can remain irrational longer than you can remain solvent."
What is the Crypto Fear and Greed Index?
It's because of this third emotionally-driven element of the market that the Crypto Fear and Greed Index (FGI) was created.
The FGI, is a free, easy-to-use, interactive dashboard that provides a daily snapshot of the general crypto market sentiment based on a variety of weighted factors such as: volatility, market volume, social media, dominance, and trends. The software automatically scrapes the internet for these variables, plugs those data into its proprietary algorithm, and updates the FGI every 24 hours.
Once the daily FGI score is calculated, it's plotted on a 0-100 scale with ratings between 0-50 representing varying degrees of "fear" and 50-100 representing varying degrees of "greed."
As of this writing, the current FGI for Jan. 3, 2022 is holding steady at 29, which is clearly within the "fear" range.
Billionaire investor says buy when there's "blood in the streets"
If you think and invest like Warren Buffett, now would be the perfect time to get into crypto when you consider his famous contrarian investment quote, "Be fearful when others are greedy and greedy when others are fearful."
There's wisdom in that perspective because people tend to get greedy when the market is rising, which results in FOMO (fear of missing out). Also, people often sell their crypto in the irrational reaction of seeing red numbers. However, the website states that the FGI seeks to remove emotional overreactions based on these two simple assumptions:
- Extreme fear can be a sign that investors are too worried. That could be a buying opportunity.
- When investors are getting too greedy, that means the market is due for a correction.
That makes a lot of sense if you want to "buy low" and "sell high" -- and isn't that the general point of investing? Another interesting feature of the FGI website is that you can look back historically and see how the trendline swings overtime. It's helpful to do that and correlate the line's movement with specific fundamental and technical events.
The FGI is useful but it's just one factor to consider
The FGI is a useful tool; however, it's only a single data point to help holders and traders alike evaluate the crypto markets with a bit less emotion and a bit more understanding during times of uncertainty. Regardless, all investment models should be considered with a grain of salt and should only be used as another data point to reference -- not the sole reason for buying or selling any asset.
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