The Fear and Greed index is calculating a number between 0-100. Where 0 signals extreme fear across the markets and 100 represents extreme greed.
The Crypto Fear and Greed Index is a sentiment indicator. It tells you whether the sentiment in the crypto markets is right now very optimistic or pessimistic. It takes information from several sources like social media behavior, Bitcoin dominance, volatility, momentum indicators, and the price trend. The crypto markets are very emotional due to their volatile nature. Investors often buy when the price is rising (FOMO) and sell whenever the price is going down (Panic).
There is a famous saying: “Be greedy when others are fearful and be fearful when others are greedy”. This might be the perfect sentence, explaining how you can use the sentiment to detect great buying opportunities. Often it is more profitable to buy when the sentiment is very fearful and to sell whenever the sentiment turns to extremely greedy levels.
It is important to note that you want to use this indicator with other signals as sentiment is a great long-term indicator. However, in the short term, it might not be that accurate. When we are seeing extreme fearful levels, it is still possible for the price of Bitcoin to decline, similar to when we are seeing levels of extreme greed, the price can still continue to climb as irrational emotions can stay for a longer period active in the markets. Therefore always make sure to look for further confirmations in different indicators.