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Bitcoin Fear and Greed Index: A Look into this Potential "FOMO Indicator"

Anthony Cerullo
November 24, 2021
A man looks at his smartphone, worried about the investments he may be missing out on.

The Fear of Missing Out (FOMO) is a phrase that describes the feeling of regret one may feel missing out on an opportunity to purchase a desirable asset. In recent years, Bitcoin has received a lot of attention from global media outlets. Some individuals invested heavily in Bitcoin without any real understanding about how it works or what potential risks it may present for them.

Using the Bitcoin Fear and Greed Index, people can easily measure the psychological fear or greed amongst crypto traders and use this information to determine whether it’s a good time to enter or exit the market at any given time. 

What is the Bitcoin Fear and Greed Index?

The Bitcoin Fear and Greed Index is a market-timing tool that bitcoin traders use to determine whether to invest in bitcoin. CNNMoney believes crypto traders are driven by fear and greed and created an index to show it. 

The Crypto Fear and Greed Index aims to give a glance at current sentiment in the market, which can affect how much traders are willing to pay for a stock. 

According to the index, when investors fear the worst, prices in the crypto market go down. When traders are greedy, they pay more than they should.

Fear & Greed Index. Source: Alternative.me

How is Crypto Fear and Greed Index calculated?

The score for the Fear and Greed index is 0-100. Zero indicates that traders are fearful and 100 indicates that traders are greedy. Extreme fear is defined as a score between zero and twenty-four  while extreme greed is defined as a score greater than seventy-five..

The index takes into account five factors, including volatility, market momentum (or volume), dominance, social media, and trends.

1) Volatility

Volatility is an indicator and benchmark of how much the price of an asset such as Bitcoin has changed over a period of time. The more volatile an asset such as Bitcoin is, the riskier it is given the large movements in the market price of the asset. In the Bitcoin Fear and Greed Index, 25% of the total score is made up of the measurement of current volatility and maximum decline.

2) Market Momentum or Volume

The ability of a market to sustain an increase or decrease in prices is known as market momentum. 25% of the total score in the index is taken up by market momentum or volume within thirty to ninety days. 

3) Dominance

The market share of bitcoin is referred to as the dominance. When the market is growing, the assumption is that it's a safe place to put your money. Dominance accounts for 10% of the total score in the index.

4) Social Media

The social media measurement analyzes the speed and number interactions using Twitter hashtags. 15% of the total score is made up of the measurement of social media factor.

5) Trends

The trends are based on the data from the Google Trend for Bitcoin-related searchers. Trends take up 10% of the total score in the Fear and Greed index.

What is FOMO?

Bitcoin, which has become a buzzword in recent years, is becoming more popular. FOMO stands for “fear of missing out” and is the experience of having an emotional reaction to the idea of potential loss of a financial opportunity. 

The term “FOMO: Fear Of Missing Out” in Bitcoin means that when we see something that we feel we need to get it, we experience anxiety because we think others might already have it, therefore we miss out.

This sense of “need” creates a psychological compulsion to acquire it, even if it means making an irrational decision. The goal is not necessarily to get the item itself, but rather to prove that you could get it if you wanted to. 

This desire can lead people into risky behavior. For example, when investors see a high increased value of a coin that they don't own, they experience anxiety. 

They fear that they will miss out on a huge financial opportunity if they don't make the trading decision soon. They race to buy whichever coin seems to be going up in price. 

***PRO TIP: Use the Barbell Strategy in tandem with YouHodler’s Multi HODL tool to capitalize on market growth while also avoiding FOMO and managing risk effectively.


How does FOMO affect your finances?

It can be difficult to realize that you are making mistakes if you are experiencing FOMO and making poor decisions. You don't want to miss out on a good investment.  When we experience this feeling, we might not be able to focus on what we want to do because we are thinking about how other people are doing it or because we think that something bad might happen to us if we don’t do it.

How to avoid FOMO?

If FOMO affects so many people and causes them to make poor decisions, then it is clear that there needs to be some kind of solution created for this problem. The first thing you need to do in order to stop FOMO is to learn how it works. 

The most important thing about FOMO trades is that they are very speculative. This means that they are very risky and also means that they are also very volatile. This means that there is a high chance of losing your money when trading these types of trades. 

This will help you understand why you feel the way you feel and give you some insight into what you can do about it. Once you know how it works, then the next step is trying out different ways of dealing with it.

How are the Bitcoin Fear and Greed Index and FOMO related

The Bitcoin Fear and Greed Index provides sentiment analysis of bitcoin markets and can be used as a FOMO indicator. The Bitcoin market behavior is highly driven by emotions, including fear and greed. 

When the market is rising, people tend to get greedy (shown as extreme greed in the index), which leads to fear of missing out on an opportunity (FOMO). In contrast, traders worry about possible trend reverses when Fear Index and Greed Index indicate extreme fear.

This causes fear of missing out on lost avoidance. It is believed that the delay in selling coins leads to larger losses and more damage. Because of this, traders are racing to sell and close their positions.

How the Bitcoin Fear and Greed Index can help people trade crypto or HODL more efficiently

The Bitcoin Fear and Greed Index provides a valuable insight of the current market’s status. The fear and greed index can be applied to determine traders' desire for stocks during a given time. 

People are scared of missing out on an opportunity when the market is in extreme greed. This causes prices to go up. It's a good time to sell your coins.

People face extreme fear of losing when Fear Index and Greed Index show traders extreme fear indicators. The high selling activity during this time causes prices to go down. If you want to buy more coins that are suitable for you, this is the time.

Conclusion 

Bitcoin is an exciting new digital currency, but also a challenging one. It was necessary for traders to take a deep dive into the technical aspects of the currency. FOMO, or the fear of missing out, is more difficult to overcome when using Bitcoin. 

The Fear and Greed index shows traders' feelings towards the market and can be used to make more rational decisions.

About the Author
YouHodler Blog Editor

Editor-in-Chief of the YouHodler blog. Connect with him about writing techniques, cryptocurrency, and music.

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