How The Fear & Greed Index Works
The Bitcoin uses a number scale of 1-100 to how investors are feeling toward the crypto market at any given time. This index uses a number of different indicators to come up with a number which ranges from social media posts to market volatility and momentum, among others.The scale is then divided into five distinct categories depending on how investors are feeling and the number that the index is on. 1-25 is considered to be extreme fear and is a time when crypto investors tend to stay away from the market due to price drops. However, this has often proven to be the best time to buy cryptocurrencies.
Next is the 26-46 range which is known as the fear territory. It is one step ahead of extreme fear but is also a time when investors are not as wary despite the rampant fear. It is also a good time to buy and precede the next stage, which is neutral.
Neutral is the region between 47-52 and signifies a time when investors are unsure of this market. Mainly, investors refrain from making any moves during this time, waiting for the market to swing either up or down before deciding their next move. One step above this is the greed level starting at 53 and ending at 75. At this time, investors are returning to the market and prices are recovering rapidly. This often ends up in extreme greed between 76 and 100, where major decisions are being made.
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Bitcoin Sentiment Rests At 72
The Fear & Greed Index is currently at 72, treacherously close to slipping into the extreme greed territory which could have massive implications for the price. Now, looking back at times when the index’s score has gone this high, it paints a picture of bullishness followed by bearishness.
An example of this is in December 2020 when the index rose into the extreme greed territory. It would continue to rise as investors trooped into the market, eventually topping out at 91. Then what followed was a crash that sent investors spiraling. The same thing happened between October and November 2021 where the score reached extreme greed before crashing.
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Given how the Bitcoin price has performed whenever the score was this high, it stands to reason that extreme greed can often act as a top signal. So the index going into the 76-100 region can often signify that it is time to exit the market.
If this trend does repeat, then the Bitcoin price could run further and mount more recovery. However, it is headed toward a market crash that could trap bulls who have not timed their exit correctly.