THE EQONEX CRYPTO GUIDE AND LEARN HUB
Eqonomics

Fear & Greed Index: Using Sentiment as a Signal

February 11, 2022

Adam Wise

Fear & Greed Index: Using Sentiment as a Signal

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:

  • 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.

Derived from multiple factors, the index will range from 0 (extreme fear) to 100 (extreme greed).

Historical index values of the Fear and Greed Index

What are the inputs?

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.

  1. Volatility: BTC Volatility & Maximum Drawdowns
  2. Market Momentum & Volume
  3. Social Media: Twitter
  4. Dominance: BTC Dominance
  5. Trends: Google Trends


 For further information, alternative.me.

Using the Fear and Greed Index to gauge the markets

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.

Key:

  • F&G” represents the strategy of only purchasing BTC using the Fear & Greed Index as a buy signal.
  •  “Daily” represents purchasing TC daily, for comparative purposes.

A) Extreme Fear

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.

  • Largest loss averted in March 2020.
  • Significant upside missed, as BTC price increased while the index remained in Greed/Extreme Greed, particularly in early 2021.
  • Average 1-month return dropped from 5.9% to 1.9% using a buy signal, versus daily purchases.

F&G strategy would have purchased BTC on less than a quarter of the days.

Did it work?

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.

B) Fear & Extreme Fear

Purchase BTC at the closing price on any day when the index signals Fear or Extreme Fear, a value of below 47.

Did it work?

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.

Conclusion: The fear and Greed Index helps avoid losses

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].

Related Articles

Eqonomics: Understanding Quantile Analysis

Eqonomics: Understanding Quantile Analysis

May 20, 2022

Adam Wise

This week we will take the concept of correlation a step further and explore another technique for visualizing the relationship between assets: quantile analysis.

Keep up with crypto through EQONEX!


This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

The Correlations in Crypto

The Correlations in Crypto

May 13, 2022

Adam Wise

As markets behave badly, we can observe how crypto correlations have developed. In this Eqonomics, we explore the timing and magnitude of the correlation between BTC & ETH.

Understanding the value and limitations of Automated Market Makers

Understanding the value and limitations of Automated Market Makers

May 9, 2022

Adam Wise

Volatile conditions negatively impact the bid/ask spread and willingness of liquidity providers to offer depth of market.

All You Need to Know About Futures Combinations

All You Need to Know About Futures Combinations

April 29, 2022

Adam Wise

Following the launch of our latest BTC dated future contract, in this week's Eqonomics we provide a quick overview of our range.

THE EQONEX CRYPTO GUIDE AND LEARN HUB

Bringing digital assets to the world.

EQONEX is a digital assets financial services company focused on delivering a full, digital asset ecosystem that offers innovative, trusted, and transparent products and services.

Keep up with crypto through EQONEX!


This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

© 2022 EQONEX Capital Pte Ltd
All rights reserved.

IS 749075