The crypto market is a market heavily influenced by investor sentiment, so measuring investor sentiment is essential. The indicator that provides insight into the current state of the market by analyzing the emotions and sensitivity of crypto investors is called the Crypto Fear & Ambition Index.
The Fear & Ambition Index is not an indicator unique to the cryptocurrency industry. For example, CNN Money uses this index to provide information about traditional markets. However, the Fear & Ambition Index has become a widely used indicator in the crypto market.
So how is this index, which shows how willing investors are to invest in the crypto market, calculated and interpreted?
How is the Crypto Fear & Ambition Index calculated?
According to the statement of Alternative.me, the company that created the Fear & Ambition Index, the index currently only considers Bitcoin (BTC). Considering that Bitcoin accounts for more than 60 percent of the market, the index can offer useful data despite its focus on a single cryptocurrency.
The index is based on five different data sources as of March 2021, and by giving different weights to each of these sources, it calculates whether fear or ambition dominates the market. These data sources are:
The Fear & Ambition Index measures the current volatility in the market and compares it with the average volatility data of the last 30 and 90 days. Unusual increases in volatility indicate that fear is dominating the market. The index gives 25 percent weight to this factor.
Market momentum / volume
The index calculates the current market volume and momentum as in volatility and compares it with the average values of the last 30 and 90 days. The daily increase in purchase volume in a positive market shows that ambition dominates the market. The index gives 25 percent weight to this factor.
Social media is undoubtedly one of the best and practical ways to measure investor sentiment. The index takes Twitter as its source in the social media factor. The index, which counts posts using various hashtags related to cryptocurrencies, then calculates how quickly and to what extent these posts receive interaction within certain time frames. The unusual increase in engagement rate shows that the interest shown in cryptocurrencies has increased and indicates that the market is dominated by ambition. The index gives this factor 15 percent weight.
Alternative.me, the company that publishes the index, conducts weekly surveys through its own survey site, strawpoll.com, and gets an idea of how investors see the state of the market. According to the company’s statement, an average of 2 thousand to 3 thousand people participate in the surveys. The index gives 15 percent weight to this factor, which it currently ceases to use.
The dominance of a cryptocurrency refers to its share of the total value of the crypto market. The index interprets the rise of Bitcoin’s market dominance as the crypto market’s increasingly safe haven, as fear dominates altcoin investors. On the contrary, the decrease in Bitcoin dominance shows that investors are becoming more ambitious and investing in more risky altcoins. The index gives 10 percent weight to this factor.
The Crypto Fear & Ambition Index uses Google Trends data for Bitcoin-related searches and examines the change in search volume. For example, the increase in search volume for a term such as “Bitcoin price manipulation” may indicate increased fear in the market. The index gives 10 percent weight to this factor.
How to interpret the Crypto Fear & Ambition Index?
As mentioned above, the sentiment of investors is of great importance in the cryptocurrency market. Too much greed or fear can result in a coin being priced lower or higher than it should be. The Crypto Fear & Ambition Index also provides data on investor sentiment, aiming to warn investors about possible price changes.
The index scores investor sentiment between 0 and 100. 0 points “extreme fear”, 100 points means “excessive ambition”. Excessive fear can be interpreted as a buying opportunity as it shows that investors are too worried. On the contrary, excessive greed suggests that investors are overly greedy for fear of missing the opportunity, so a correction may soon occur.
Excessive fear prevailing in the market can cause investors to sell without sufficient reason and only out of concern, the successive liquidation of long positions in the futures market due to the price drop resulting from these sales, and a further decrease in the price. Seeing such situations as buying opportunities can be a logical step in situations where the market is analyzed correctly.
On the other hand, the turning of the pointer to excessive ambition can indicate that investors who do not want to miss the opportunity in cases of rapid price increases are flocking to crypto assets. Excessive ambition suggests that very soon investors may start taking profits, so a correction may occur. Selling in situations where market sentiment shows excessive ambition may be the right step in situations where fear of missing out on the market is thought to prevail.
The Crypto Fear & Ambition Index may not provide a definitive result, as it is based solely on investors’ mood data. In the Bitcoin bull markets, this index can often signal excessive ambition, but the bull market may continue after normal corrections in the industry.
Crypto Fear & Ambition Index historical chart. Source: Alternative.me
The index is at 76 points as of March 7, 2021, indicating that excessive ambition is currently dominating the crypto market.
Crypto Fear & Ambition Index as of March 7, 2021. Source: Alternative.me
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Reminding: No technical indicator alone is sufficient to predict prices. As with almost every indicator data, the Crypto Fear & Ambition Index makes sense when used in conjunction with other market data.
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