Faced With a Prolonged Bear Market, How Should Investors Adapt?
In May more than $600 billion in value was lost from digital wallets and cryptocurrency exchanges across the crypto industry, exacerbating the likelihood that the current crypto winter will be longer and market sentiment will descend further into negative territory. When we refer to market sentiment, it’s a testament to the fact that investing is an emotional as well as a financial activity. The psychological aspect can affect people’s investment decisions because few people can maintain a patient, self-disciplined and rational attitude, in order to effectively sell, buy or to hold.
What is the Crypto Fear and Greed Index?
One way to measure market sentiment across the cryptocurrency space is to use the Crypto Fear and Greed Index (FGI). It provides a free, easy to use snapshot of general market sentiment within the crypto space. It’s updated daily using a range of different factors including volatility, market volume, social media, dominance, and trends, drawn from various sources.
FGI is designed to help eliminate emotional overreaction and enable crypto investors to make more rational decisions in an industry that is more volatile and irrational than other markets. After compiling the FGI scores each day, they are plotted on a 0–100 scale, with a scale between 0–50 representing varying levels of fear and a scale between 50–100 representing varying levels of greed. The aim of the creators of the index is to “try to save you from your own emotional overreactions”.
As of now, the FGI index has dropped to 11, in the extremely fearful range, marking the lowest level of investor sentiment towards cryptocurrencies in nearly a month. On June 15, FGI’s minimum index was 7, which is not only a sign of “extreme fear” among cryptocurrency investors, but also the second-worst rating since February 2018. Many people believe that the US Fed’s interest rate hike plan may lead to a further reduction in the FGI index, which will also keep the price trend of the entire cryptocurrency depressed. So, with the market down is now a good time to buy cryptocurrencies?
Is now a good time to buy cryptocurrencies?
Generally speaking, when the market is rising, the average investor becomes greedier, which makes FOMO (fear of missing out) sentiment spread and is the wrong time to buy. In comparison, the idea of buying low and selling high never goes out of fashion. In addition, some investors prefer to hold crypto assets for a long time. They believe that when the price falls, an approach of long-term holding can effectively cover the losses caused by the falling price of the currency and make a profit when the price of the cryptocurrency rises. This smart contrarian approach is the exact opposite of what the average investor does. The FGI index helps neutralize the emotional overreaction of investors to help them get the most out of the buy low and sell high approach. As the FGI website itself explains:
• Extreme fear may indicate that investors are too worried, which could be a good time to buy.
• When investors become too greedy, it means the market is due for a correction.
A neat feature of FGI’s website is that it provides historical tracking data for the index since its inception in February 2018, allowing investors to chart the movement of the index, which can be used to discover what has happened in the cryptocurrency market over the long term. As explained by Matthew Makowski, senior research analyst and writer at Investment U: “What’s useful to know about the crypto fear and greed index is how much it has correlated with the price of Bitcoin over the past four years. When the greed is high, so has been the price of Bitcoin and vice versa. this index can be a very useful tool for active traders. It’s become a particularly reliable technical indicator for the crypto markets.”
BigONE believes that before investing in cryptocurrencies, it is necessary to take the time to carefully research and learn about the cryptocurrency you want to invest in, while remembering that no investment model is 100% accurate. While FGI is a useful tool, it is only one data reference focusing on the qualitative aspects. When the price of cryptocurrencies surges to new highs or falls to new lows, it can be a resource to help you make your cryptocurrency investments more clearly and rationally by allowing you to easily benchmark market trends.
