Investing in Bitcoin is a wild and bumpy ride. Some choose to “HODL,” while others decide to trade the normally volatile crypto asset. Both are subject to extreme fluctuations in price, however, traders can turn market sentiment into a profitable trading signal.
Here’s how the cryptocurrency market fear and greed index can be used as a trade trigger, along with a clear anomaly where such a strategy proved completely ineffective.
Contrarian Trading Against Speculative Sentiment And Hype
Sentiment in the crypto market is nearly as all over the place as prices are. One day, prices are pumped and investors are calling for Lambos and Citadels, then the next day they’re expecting a catastrophic drop.
Whatever the direction is, the herd and the mainstream media are usually wrong, while institutional investors using advanced strategies profit from taking an opposing position.
Financial market sentiment can almost always be used as a contrarian indicator. But in a speculation driven industry where hype and buzz matter more than fundamentals, this is even more true.
Some of the wealthiest investors of all-time, including Warren Buffett and Baron Rothschild advocate taking contrarian positions. They also offer quotes that act as a reminder to do the opposite of what behaviors natural human emotion usually triggers.
“Be fearful when others are greedy, and greedy when others are fearful,” the Oracle of Omaha’s famous quote reads.
Bitcoin BTCUSD Crypto Market Fear and Greed Index | Source: TradingView
Can The Crypto Market Fear And Greed Index Be a Profitable Buy and Sell Signal?
In the crypto market, because sentiment is so critical, there exists a Fear and Greed index.
The tool itself can be used as a contrarian buy or sell signal. In the first half of the Bitcoin bear market, the index could have been a practically perfect indicator for tops and bottoms.
During Bitcoin’s parabolic rise in Q2 2019, the Fear and Greed index suddenly became worthless as an indicator. The anomaly is the only period since the asset’s bear market started where the index wasn’t especially helpful.
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After some consolidation above $10,000, the asset fell back into a bear market, and shockingly once again the index began working like a charm.
When BTCUSD approached $10,000 where it fell from the earlier, the index tipped toward greed, and a sell order would have been profitable. Each time, the asset would have been a buy when fear once again peaked.
Bitcoin price is pumping once again, and so is the index into greed territory. With this lead to yet another profitable sell signal, or like the blue box and anomaly from 2019, is the crypto asset about to skyrocket again?