The fear and greed index is one of the simplest yet most popular indicators of cryptocurrency market sentiment. Today, its value has fallen to 8 on a scale of 0 to 100, which last happened more than two years ago during the COVID-19 crash.
The fear and greed index is one of the simplest yet most popular indicators of cryptocurrency market sentiment. Today, its value has fallen to 8 on a scale of 0 to 100, which last happened over 2 years ago during the COVID-19 crash.
The extremely low values of the Fear and Greed Index indicate that there is extreme fear in the cryptocurrency market today. Usually, such conditions, according to Warren Buffett’s popular motto, are excellent buying opportunities.
“Be afraid when others are greedy. Be greedy when others are afraid.”
Despite this, a simple and straightforward interpretation of this indicator in the crypto market could lead to a rapid liquidation of funds. Extreme fear often begins at the very beginning of the declines and extreme greed long before the end of the increases.
Moreover, historical analysis of the moving averages of the Fear and Greed Index shows that even the end of the declines did not mean the start of the uptrends. It turns out that it has always taken several months between extreme lows in the index and the start of the cryptocurrency bull market. This period was generally a long period of consolidation and a sideways trend.
Fear and Greed Index at lowest since COVID-19 crash
According to data from Alternative.me, the current Fear and Greed Index value is 8 on a scale of 0 to 100. This value comes after about 6 months of decline. During this period, the index very rarely exceeded the zone of extreme fear (range 0-24) or fear (25-49).
In all the available history of the index, a value of 8 or less has only been reached 3 times before (red circles). This happened in February 2018 (BTC bottomed out at $6,000), August 2019 (BTC bottomed out at $9,320) and March 2020 (BTC bottomed out at 3,782 $).
Even when bitcoin hit the macro low of the previous bear market at $3156 in December 2018, it drove the fear and greed index to a reading of 9. Today we see a reading of 8 or less for the 4th time since the creation of this indicator.
The end of the bear market? Not necessarily!
It would seem that the extremely low values of the fear and greed index only appear at the absolute lows of the price of BTC. However, it is only by looking at the examples above that we can see that even extreme readings do not necessarily signal a bottom in Bitcoin price.
Crypto market analyst @Pladizow tweeted a chart of BTC price, highlighting areas where the index gave extremely low readings. He confirmed – according to our analysis – that the indicator has only been as low as 4 times in history (the March 2020 crash appears twice in his chart). However, he added that “after the first two, the price went down again.”
Another illustration of the same concern with not interpreting the index in a simple and inverse way is provided by a chart from LookIntoBitcoin.com. It color codes the long-term chart of Bitcoin to provide information about the fear and greed index on a given day.
Indeed, extreme red readings appear at the bottom of the BTC price. However, on top of that, we can successfully find them in various stages of extended declines. Conversely, we are already seeing extreme green readings in the early weeks and months of bulls. Moreover, reaching the previous two all-time highs – $64,500 in April 2021 and $69,000 in November 2021 – was not accompanied by the greenest of green dots at all.
Waiting for the EMO cross
In a recent analysis for BeInCrypto, @AtomowyInvestor highlighted how the index’s moving averages can be used to better determine the state of the cryptocurrency market. He pointed to the so-called “EMO crossover”, which in the two previous cases was a good signal for the start of bull markets.
An EMO crossover occurs when the short-term moving averages (quarterly, SMA 91 and semi-annual, SMA 182) of the fear and greed index cross above the long-term (annual, SMA 365). Moreover, the quarterly also exceeds the semi-annual at this point. The last two times this happened (white circles) it signaled the start of the bull markets of 2019 and 2020-2021.
In the current market situation, the moving averages that interest us are already in their pre-bullish positions. However, they are still quite far from being crossed. Also, for the past few weeks, their charts remain flat and do not show a trend leading to a quick breakout. Atomic Investor refers to such status as “Pending”.
In conclusion, extremely low Fear and Greed Index readings are not so much a signal of a market bottom as a gradual trend towards one. Therefore, simply interpreting maximum fear in the market as a short-term buy signal is the wrong strategy.
Nonetheless, the negative sentiment should be the point at which a smart investor becomes increasingly interested in the bleeding market and patiently looks for opportunities to join it. However, the opposite is usually true.
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