Positive bitcoin sentiment has increased quite rapidly over the past few months as the market has experienced an incredible recovery. This caused the bitcoin Fear & Greed Index to go from deep fear to deep greed and that greed continued to grow. Now, sentiment is bordering on extreme greed, which may be good in the short term, but could become inherently bearish for the price.
How the fear and greed index works
bitcoin bitcoin-fear-greed-index-drops-neutral-first-july/” rel=”nofollow”>Fear and Greed Index Use a numerical scale from 1 to 100 to crypto/fear-and-greed-index/” rel=”nofollow”>identify how investors feel towards the cryptocurrency market at any given time. This index uses a number of different indicators to come up with a number ranging from social media posts to market volatility and momentum, among others.
The scale is then divided into five different categories based on how investors feel and what number the index is at. 1-25 is considered an extreme fear and is a time when cryptocurrency investors tend to stay away from the market due to price drops. However, this is usually the best time to buy cryptocurrencies.
Next is the 26-46 range, known as fear territory. It's a step up from extreme fear, but it's also a time when investors are not as cautious despite rampant fear. It is also a good time to buy and advance the next stage, which is neutral.
Neutral is the region between 47 and 52 and signifies a time when investors are unsure about this market. Mainly, investors refrain from making any moves during this time, waiting for the market to rise or fall before deciding their next move.
One step above this is the greed level which starts at 53 and ends at 75. Right now, investors are returning to the market and prices are recovering quickly. This often ends in extreme greed between the ages of 76 and 100, when important decisions are made.
<img decoding="async" class="aligncenter size-medium" src="https://www.tradingview.com/x/lu2VAEh9/" alt="Tradingview.com bitcoin Price Chart” width=”2650″ height=”1530″ loading=”lazy”/>
btc price reclaims $44,000 | Source: BTCUSD on Tradingview.com
bitcoin Sentiment Sits at 72
The Fear & Greed Index currently sits at 72, treacherously close to falling into extreme greed territory, which could have massive implications for the price. Now, looking back at the times when the index score has reached this high point, a picture of optimism followed by bearishness presents itself.
An example of this is in December 2020, when the index rose into extreme greed territory. It would continue to rise as investors flocked into the market, eventually reaching a high of 91. Then what followed was a crash that sent investors into the ground. The same thing happened between October and November 2021, where the score reached extreme greed before crashing.
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Source: alternative.me
Given bitcoin's price behavior whenever the score was this high, it stands to reason that extreme greed can often act as a top signal. Therefore, an index that enters the 76-100 region can often mean that it is time to exit the market.
If this trend repeats, then the price of bitcoin could rise further and lead to a further recovery. However, it is heading towards a market decline that could trap bulls who have not timed their exit correctly.
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