Atomic Investor takes a closer look at the Fear and Greed Index. It not only looks for temporary signals of dominant emotions in the cryptocurrency market, but also those that can show long-term turning points.
Can the Fear and Greed Index be used to analyze Bitcoin cycles? Should we accumulate or sell our crypto-currencies right now?
Cryptocurrency Market Sentiment Analysis
Emotions in all types of investment and non-investment markets are a major determinant of the behavior of many people, including investors. Volatility in the cryptocurrency market is high, and with high volatility comes high emotion. Such volatility in the case of the cryptocurrency market is best illustrated by the Fear and Greed Index, which shows whether there is optimism (greed) or pessimism (fear) in the market.
By analyzing the historical data for the period from February 1, 2018 to December 31, 2021, we can see that on average over the year, 57% are fear (23% extreme fear, 34% fear) and 34% greed (21% greed, 13% extreme greed). The number of hits only tells their statistics, but does not show market volatility. From the collected data, moving averages of different periods were calculated for fear (Fear + Extreme Fear) and for greed (Greed + Extreme Greed). This shows how optimism and pessimism alternate in the cryptocurrency market.
In the Fear vs Greed 50-SMA and Fear vs Greed 200-SMA charts, it can be seen very well that when the price of Bitcoin increases significantly, greed also increases and fear decreases. The opposite behavior is seen for Bitcoin declines – then fear dominates and greed drops. In the current situation, you can see that fear is quite high and greed is low. Does this mean increases are coming?
The moving average of the sum of Fear + Extreme Fear and Greed + Extreme Greed alone already shows the cyclical volatility of the market. However, it does not give good signals that may indicate that the market is in a sentiment that is best to exit slowly or that would indicate an accumulation. The idea would be to accumulate assets when overall fear is relatively high (and greed is relatively low). On the other hand, it is necessary to average the market exits when the behavior of the curves is exactly the opposite.
Fear and Greed Index Moving Average Analysis
The next step focuses on the moving averages of the fear and greed index itself as a resultant value of the prevailing sentiment in the cryptocurrency market.
The key to moving average analysis is to select the appropriate period from which the moving average is calculated. You can talk about short, medium and long term averages, the most common being 50-SMA, 100-SMA and 200-SMA. The values 50, 100 and 200 determine the number of last sessions, from which the average is calculated. Cycles on Bitcoin are assumed to last around 4 years, which is somewhat dictated by the halvings. Thus, moving averages of 365 days (annual SMA), 191 days (semi-annual SMA) and 91 days (quarterly SMA) were used for the analysis.
Conclusions of the long-term analysis of the fear and greed index
Analyzing the BTC vs F&G SMA chart allowed us to draw some important conclusions:
- The best time to accumulate Bitcoin is when the quarterly 91-SMA-F&G is in the green zone in the 20-30 F&G range.
- A cross of the semi-annual 182-SMA-F&G from above through the quarterly 91-SMA-F&G (death cross), signaled time to exit the market. At this point, quarterly greed exceeded semi-annual greed, triggering declines each time.
- The point where the three moving averages, quarterly, half-yearly and annual, crossed twice indicates the point after which the bull market started. This point Atomic Investor called the “EMO Cross”.
- Much of the information from the F&G-SMA trend analysis indicates that another EMO crossover is possible in the coming weeks/months.
- We can also observe that the quarterly 91-SMA-F&G twice adopted a characteristic pattern (black curve). During the periods 2018-2020 and 2020-2022, a great euphoria was first observed, followed by a rebound and again euphoria. Is it possible for such a pattern to repeat itself again? If so, the end of such emotional behavior would be just before the next halving, which is estimated for Q2/Q3 2024.
- Additionally, the annual 365-SMA-F&G draws an ascending base (white dotted line). This may indicate that in the long run, fear in the cryptocurrency market is decreasing i.e. it is taking shorter durations compared to greed/neutrality. Conversely, it could be related to greater cryptocurrency adoption, greater awareness, more HODLers, and greater utility of blockchain technology.
- Finally, the intersections of the moving averages of the Fear and Greed index were compared to the crosses of the moving averages of the Bitcoin price. Averages of the same periods were used – quarterly and half-yearly. From the analysis, it can be concluded that the emotions determine the price and not the price determines the emotions. An increase in euphoria occurs before prices rise and fear occurs near the price peak.
A thorough analysis of the fear and greed index, by calculating different moving averages, allowed to interpret it in a broader spectrum. This indicates that the sentiment of the cryptocurrency market is cyclical.
The right interpretation and assumptions give reason to believe that cryptocurrency market sentiment moving averages can be a good indicator to suggest turning points in the price of Bitcoin. Thus, they can be used for long-term investing in the main cryptocurrency.
If you want to stay up to date with this indicator, be sure to follow Atomic Investor on Twitter and visit his atomic blog.
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Trend sleuth and cryptocurrency and precious metals enthusiast. A proponent of the atomic approach to personal development. A doctorate in science gives him the feeling of being able to correlate theoretical and empirical data and draw meaningful conclusions. Reality, however, verifies his assumptions.
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