Emotions move markets.

Greed drives price up.

Fear drives price down.

Human psychology tends to be predictably irrational because many people tend to react similarly in certain contexts.

This is what Technical Analysis is all about — using tools such as volume and past market data to predict price moves.

So if people behave the same way in certain contexts — is it possible to make money just by being a contrarian and behaving differently to others?

Absolutely.

Baron Rothschild made a fortune by buying when others sold in panic. His philosophy was to “Buy when there’s blood in the streets.”

Warren Buffet shares this philosophy and is often quoted “Be fearful when others are greedy and greedy when others are fearful.”

Or as John Templeton put it: “Invest at the point of maximum pessimism.”

Because the greater the fear — the larger the opportunity for profit.

The Fear and Greed Index

If it is profitable to act contrary to how others are feeling about the market, then it is important to be able to pinpoint moments of fear and moments of greed.

Because tuning into investor sentiment can give you an idea as to how you should act.

If others are greedy — you should be fearful.

If others are fearful — you should be greedy.

One such tool that measures market sentiment is the Fear and Greed Index.

The Fear & Greed Index measures Crypto Market Sentiment

The Fear and Greed Index aggregates data from various sources and generates them into one number, on a scale of 0 to 100.

A value of 0 means “Extreme Fear” while a value of 100 means “Extreme Greed.”

The Index measures Fear & Greed on a scale of 0 to 100

This data is compiled daily.

In fact, you can glean the data of this Index on a daily, weekly, monthly, or even yearly basis.

For the purpose of this article, I’m looking at the values of the Fear & Greed Index dating all the way back to February 2018 to answer the following question:

Are there any recurring themes how people feel about the Bitcoin and the cryptocurrency market?

Tendencies in the Fear & Greed Index

Extreme fear is where the first signs of greed are born

As we can see from the graph, fear can quickly gain momentum and spiral out of control.

But every time the Fear and Greed Index reaches close to or below the 10 mark (i.e. green area) — the value of the Index reverses to the upside.

Data talks.

So what is it saying?

Every time high levels of fear have crept into the minds of traders and investors — opportunists such as “bargain hunters” have used this dreadful market climate to their advantage.

In the spirit of savvy investors like Warren Buffet, Baron Rothschild, or John Templeton — the “bargain hunters” were greedy when others were fearful.

They were interested in Bitcoin at a point of maximum pessimism.

Because it is at extreme levels of fear where the first signs of greed are born.

Remember that fear can quickly gain momentum and spiral out of control, and just like any emotion — so can greed.

And since emotions move markets — fear drives price down, greed drives price up — then the Fear and Greed Index should be able to give you an idea as to when to buy Bitcoin and when to sell it.

How to Use the Fear & Greed Index to Predict Bitcoin Rallies

The Fear & Greed Index tends to reverse when it approaches “Extreme Fear” territory.

This is the moment that fear transitions into very early signs of greed and reverses to the upside into full-blown greed territory.

So if a gauge of how people feel towards Bitcoin reverses to the upside when market sentiment is near extremely fearful levels — will Bitcoin’s price follow suit?

The reversal points on the Fear & Greed Index have been plotted analogously to Bitcoin’s price chart. See below for the results.

The Fear & Greed Index accurately predicts bullish reversals in Bitcoin’s price

How much did Bitcoin rally after key reversals in the Fear & Greed Index? “Extreme Fear” levels on the Index have always resulted in bullish reversals in Bitcoin’s price

The Fear & Greed Index accurately predicts reversals in Bitcoin’s price action.

Every time the Fear & Greed Index reached close to extreme levels of fear, this often predicted a reversal in Bitcoin’s price.

This confirms a very important finding:

The more extreme the feelings people have towards the market, the more likely a trend reversal is set to occur for Bitcoin.

Extreme fear towards Bitcoin has historically translated into moments of financial opportunity.

Extreme fear = point of financial opportunity

The Crypto Fear & Greed Index has once again made its way towards “Extreme Fear” levels.

The last time the Index visited these levels was in mid-December 2018 when Bitcoin bottomed at $3,200 before beginning its new bull trend.

In other words, people in the Crypto market are feeling just as fearful at current Bitcoin levels of $10,000 as they were when Bitcoin bottomed at $3,200 back in December 2018.

Conclusion

The Fear & Greed Index is a great indicator for predicting when a local bottom has formed on Bitcoin’s price and from where a rally could approximately occur.

Though it won’t tell us at which specific price point Bitcoin will reverse to the upside, the Fear & Greed Index has proven to be a valuable tool in timing a shift in market sentiment and subsequent reversal in Bitcoin’s price.

If history is anything to go by, it is likely that people’s feelings towards Bitcoin will dramatically shift sooner rather than later and along with that— so will Bitcoin’s price.

Thank you for reading.

P.S. If you’d like to learn how trade cryptocurrencies, feel free to check out my 5-star Technical Analysis course.