Bitcoin is finally showing a sustained bullish push as it has now broken above $47,300, but overly positive sentiment can be an obstacle to this rally.
Bitcoin Fear & Greed Index Suggests Market Is Nearing Extreme Greed
The “Fear & Greed Index” is an indicator that tells us about the general sentiment among the investors in the Bitcoin and wider cryptocurrency sector. According to Alternative, its creator, the index takes into account five factors to calculate this sentiment.
These are volatility, market volume, social media sentiment, market cap dominance, and Google Trends. The index outputs the sentiment as a number lying between zero to hundred.
All values of 46 and under imply the investors are fearful, while those of 54 or over suggest the presence of greed in the market. The region between 47 and 53 corresponds to the region of neutral sentiment.
Now, here is what the Fear & Greed Index looks like for Bitcoin right now to see which of these regions the market stands in at present:
As is visible above, the Bitcoin Fear & Greed Index has a value of 72 at the moment, implying that the majority of the investors in the space share a greedy mentality.
Besides the three core sentiments mentioned earlier, there are also two extreme ones: the extreme fear and extreme greed. The former of these occurs at values of 25 and under, while the latter takes place at 75 and above.
Historically, these two sentiments, in particular, have held great significance for the cryptocurrency’s trajectory. Generally, at any point, the asset is more likely to move against the expectations of the majority, and in these extreme regions, this expectation becomes the strongest.
As such, these sentiments have been where major reversals in the asset have been the most likely to occur. Followers of a trading philosophy called “contrarian investing” exploit this fact to time their buying and selling moves. Warren Buffet‘s famous quote sums up the idea, “Be fearful when others are greedy, and greedy when others are fearful.”
At a value of 72, the Bitcoin market is quite close to entering into the extreme greed region right now. Just yesterday, the metric had a value of 66, which means there has been some jump in just the past 24 hours.
This increase in the index has naturally come because of the bullish momentum that the asset has enjoyed in the past day. Any further improvements in sentiment, however, may be alarming, as the metric would then enter into the extreme greed territory.
The last time that the Bitcoin Fear & Greed Index surged into extreme greed values was around the time of the approval of the spot exchange-traded funds (ETFs). As it happened, the coin hit its top, coinciding with this overly bullish mentality.
Thus, if this precedence is anything to go by, any visit into the territory in the coming days may serve as a warning that a top is near for the cryptocurrency.
Bitcoin has enjoyed an uplift of over 6% during the past 24 hours as its price has cleared the $47,300 level.