Atomic Investor takes a closer look at the Fear and Greed Index. He looks for not only temporary signals of prevailing emotions in the cryptocurrency market, but also ones that may show turning points in the long run.
Can the Fear and Greed Index be used to analyze Bitcoin cycles? Should we accumulate or sell our cryptocurrencies at the moment?
Cryptocurrency market sentiment analysis
Emotions in any type 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 high volatility is accompanied by high emotions. Such volatility in the case of the cryptocurrency market is very well illustrated by the Fear and Greed Index, which shows whether there is optimism (greed) or pessimism (fear) in the market.
Analyzing the historical data for the period Feb 1st, 2018 – Dec 31st, 2021, we can see that, averaged over the year, 57% are Fear (23% Extreme Fear, 34% Fear) and 34% Greed (21% Greed, 13% Extreme Greed). The number of occurrences tells only their statistics, but does not show the volatility of the market. From the collected data, moving averages of different time frames 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 both the Fear vs Greed 50-SMA and Fear vs Greed 200-SMA charts, it can be seen quite well that when the price of Bitcoin goes up significantly, then greed also increases, and fear decreases. The opposite behavior is observed for Bitcoin declines – then fear dominates and greed falls. In the current situation, you can see that fear is quite high and greed is low. Does this mean that increases are coming?
The moving average counts of the sum of Fear + Extreme Fear and Greed + Extreme Greed alone already show how cyclically volatile the market is. However, it does not give good signals that may indicate that the market is in a sentiment from which it is better to exit slowly or one that would indicate accumulation. The idea would be to accumulate assets when aggregate fear is relatively high (and greed is relatively low). In contrast, one should average market exits when the behavior of the curves is exactly the opposite.
Analysis of moving averages of the Fear and Greed Index
The next step focuses on the moving averages of the Fear and Greed Index itself as a resultant value of the sentiment prevailing in the cryptocurrency market.
The key to analyzing moving averages is to select the appropriate period from which the moving average is calculated. You can talk about short-term, medium-term, and long-term averages, the most common are 50-SMA, 100-SMA and 200-SMA. Values 50, 100, and 200 determine the number of last sessions, from which the average is calculated. It is assumed that cycles on Bitcoin last about 4 years, which is somewhat dictated by 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 from the long-term analysis of the Fear and Greed Index
The analysis of 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 by the quarterly 91-SMA-F&G (death cross), indicated the moment to exit the market. At that point, the quarterly greed crossed the six-month greed, which triggered declines every time.
- The point where the three moving averages, quarterly, semi-annual and annual, crossed twice indicated the point after which the bull market began. This point Atomic Investor called the “EMO Cross.”
- Much of the information from the F&G-SMA trend analysis indicates that another EMO Cross is possible in the coming weeks/months.
- It can also be observed that the quarterly 91-SMA-F&G has twice adopted a characteristic pattern (black curve). In the periods 2018-2020 and 2020-2022, first a large euphoria was observed followed by a rebound and again euphoria. Is it possible for such a pattern to be repeated again? If so, the end of such emotional behavior would be right before the next halving, which is estimated for Q2/Q3 2024.
- Additionally, the annual 365-SMA-F&G is drawing an ascending base (white dashed line). This may indicate that in the long run, the fear in the cryptocurrency market is getting smaller, i.e. it is taking shorter durations relative to greed/neutrality. Conversely, this could be related to greater cryptocurrency adoption, greater awareness, more HODLers, and greater utility of blockchain technology.
- Finally, the intersections of the moving averages for the Fear and Greed Index were compared to the crosses of the moving averages of the Bitcoin price. Averages from the same time periods were used – quarterly and semi-annually. From the analysis, it can be concluded that emotions determine price and not price determines emotions. An increase in euphoria occurs before the price rises and fear occurs near the price peak.
An in-depth analysis of the Fear and Greed Index, by calculating various moving averages, has enabled it to be interpreted 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 moving averages of cryptocurrency market sentiment can be a good indicator to suggest turning points in Bitcoin’s price. Thus, they can be used for long-term investing in the major cryptocurrency.
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Trend detective and cryptocurrency and precious metals enthusiast. A proponent of the atomic approach to personal development. A PhD in science gives him a sense of being able to correlate theoretical and empirical data and draw meaningful conclusions. Reality, however, verifies his hypotheses.
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