It’s the calm before the storm. What to do when the Fear and Greed index turns grey? Warren Buffett already told us to be greedy when others are fearful. We already know that we should be fearful when others are greedy. What should we do when the market it’s at a rare state of balance and expectations are high? We should probably take a page for those Bitcoin maximalists and… wait for it… HODL!
One of the main criticisms that the Fear and Greed Index gets is that it encourages traders and investors to try to time the market instead of holding strong. Bad things happen to those who try to time the market. Yet, we try to do it. The temptation is too strong. Bad things happen to those who trade emotionally. Yet, some fall for that trap over and over again. In fact, it could be argued that the Bitcoin and cryptocurrencies markets are even more emotional than the traditional ones. And that’s saying a lot.
In any case, before making any rash decisions, we should remember what we’re talking about here.
The Fear & Greed Index goes into neutral territory | Source: Arcane Research
What Exactly Is The Fear And Greed Index?
We at NewsBTC deal with this constantly. Even though the Fear and Greed Index is a criticized and questionable indicator, there’s an undeniable connection to the market that’s obvious even to the casual observer. When we found a bizarre correlation between the Fear & Greed Index and UTXO data, we prefaced it with:
“As a speculative asset, nothing else quite behaves like Bitcoin. Shifts in sentiment take price action to the extreme. As a result, tools have been developed to monitor the fear or greed in the market.”
The website Alternative.me calculates the main Fear And Greed Index for cryptocurrency markets, they explain its reason to be as:
The crypto market behaviour is very emotional. People tend to get greedy when the market is rising which results in FOMO (Fear of missing out). Also, people often sell their coins in irrational reaction of seeing red numbers. With our Fear and Greed Index, we try to save you from your own emotional overreactions. There are two simple assumptions:
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.
We, very simply, explained why when we described how the Fear And Greed Index can be used as a trigger indicator:
“Financial market sentiment can almost always be used as a contrarian indicator. But in a speculation driven industry where hype and buzz matter more than fundamentals, this is even more true.”
BTC price chart on Bitstamp | Source: BTC/USD on TradingView.com
What Does It Mean When The Sentiment Turns Neutral
After what seemed like years of coldness and extreme fear, the market sentiment started improving as early as a week ago. And, even though it doesn’t feel that way, this advance into neutral territory is a huge improvement. As Arcane Research said in their “The Weekly Update” report:
“The Fear & Greed Index has climbed rapidly since late July and touched neutral levels for the first time since May. Despite the slight decline in the last couple of days, the market is certainly getting more bullish. This bullishness is also evident in the futures market.”
So, what should you do now that the sentiment turned neutral? Not much. Keep your finger on the trigger, though. Things are about to get interesting.
Featured Image by Kristopher Roller on Unsplash - Charts by TradingView