Can Collective Wisdom Predict Bitcoin’s Fluctuations?

Analysing the Fear & Greed index, we can predict what to expect on the cryptocurrency market — a decline or upswing. Enthusiasts have compared sentiment in the crypto community following changes in the bitcoin price over a six month period.

How the Fear & Greed index works

Measurement of fear and greed is considered a useful indicator of market sentiment. It fluctuates from 0 to 100, where the 45–55 interval indicates neutral sentiment, while deviations beyond that interval demonstrate:

  • the increase of fear on the crypto market — if the index is approaching 0, an extremely high level of fear;
  • the aggravation of market players’ greediness — if the index is approaching 100, an extremely high level of greed.

The Fear & Greed index can be presented as a polygonal curve on a graph. Thus, its downward movement will presage a decrease in the BTC price and massive sales, since owners will sell their coins out of fear. And upward movement will signal a current increase in the bitcoin price due to growth of demand for the coin.

Analysts have decided to check the correspondence of changes in market sentiment with the fluctuation of the BTC price to determine the possibility of predicting the price outlook. First, they created one graph where a black curve reflects the level of fear and greed over the last six months. Then they combined it with another graph where a blue curve reflects the volatility of the first cryptocurrency over the same period.

Fear & Greed index and bitcoin price

What can we see on the graph?

It is not difficult to note the clear connection between sentiment and the price. Based on this, we can draw the following conclusions:

  1. Today’s level of 39 speaks to a virtually neutral attitude. This is not overly optimistic, because there is already little predisposition to buying up the cryptocurrency, in comparison to the first half of the summer.
  2. At the end of June, the greed indicator peaked, and at that same time, bitcoin reached its maximum price of the year. The fall from 13,000 USD coincided with the indicator’s shift to the fear zone. From this moment on, even slight decreases in price have been accompanied by the achievement of a minimum point in the index. An apprehensive attitude in the crypto community with regard to downturns, accompanied by massive sales during any sharp dynamics, is evident.
  3. The main cryptocurrency has repeatedly managed to deceive the market. Its price increased abruptly on waves of panic on 5 June and 28 July. And on 25 October, it experienced growth of 20% over the course of a single day.

But, all the same, we cannot draw an unequivocal conclusion on the basis of these results. On the one hand, there is a strong relationship between market expectations and bitcoin’s movements. As the price rises, greed drives investors to buy the cryptocurrency, and they contribute to its accelerated growth with their mass purchases. On the other hand, in a seemingly impossible-to-lose situation, people later end up with losses, which testifies to bitcoin’s unpredictability.