Welcome to Eqonomics, the weekly crypto trading newsletter from EQONEX. This week, Adam takes a look at The Crypto Fear & Greed Index and investigates whether it can be used as a trading signal.
The Crypto Fear & Greed Index is published daily by alternative.me, with data going back to February 2018. The index level is contrarian in nature:
Derived from multiple factors, the index will range from 0 (extreme fear) to 100 (extreme greed).
Currently, 5 factors are employed to calculate the daily index value.
Each data point is valued the same as the day before in order to visualize a meaningful progress in sentiment change of the crypto market.
For further information, alternative.me.
The following are simplistic simulations to gauge how an investor would have fared using the Fear & Greed Index as a buy signal. Daily data from 1st February 2018 to 7th February 2022.
Returns are calculated for periods of 1 month, 3 months, 6 months, and 12 months following a buy signal.
Purchase BTC at the closing price on any day when the index is signaling Extreme Fear, a value of below 26.
Example: 1-month returns
Any day the index value is below 26, BTC is purchased and then sold a month later. The return is measured in percentage terms and plotted on the chart below ("F&G").
Daily purchases, which are also sold one month later but without taking into account any signal, are represented by the grey line.
F&G strategy would have purchased BTC on less than a quarter of the days.
The full results, including the longer holding periods.
The F&G strategy avoided the largest loss but with a lower average return in most cases. Apart from the 12M returns, the maximum return was roughly half that of daily BTC purchases for the shorter time frames.
Purchase BTC at the closing price on any day when the index signals Fear or Extreme Fear, a value of below 47.
Although more of the upside is captured versus Extreme Fear only signal, minimum returns are close to a daily investment—lower average returns across all time frames.
The results should be treated as a light assessment of the index as a signal. Across certain time frames, the signal could help avoid the tail losses, but average returns are consistently lower. Historically, BTC has had long Greed or Extreme Greed periods where the price kept rising, resulting in missed buying opportunities using this signal.
We would be pleased to discuss this subject or other potential trading signals and strategies.
Got any questions? Reach out to us at [email protected].
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