We all know what the Bitcoin Sentiment Index is and we use it to see how the market is doing. There is a place where this index is known as the "Fear and Greed Index". When it is very low we operate with caution and when it is very high we are overcome with optimism. But we do not know how it works, how it is formed. Let's shed some light on what it is and how it is formed.
The index is created by alternative.me and is composed of several factors in the following proportions:
- Volatility 25%: It measures the price variations of bitcoin in its 30 and 90 day values. If there is an increase in volatility it is understood that the market is afraid. Sudden variations in a very short time are not good for any investment product, it can be to go up or down.
- Momentum / Market Volume 25%: If the trading volume is very low it may indicate that investors are not interested in bitcoin and, on the contrary, its volume is very high it is indicative of great activity. It should be noted that a very high volume occurs when whales start buying or selling, the rest of the investors do not have the capacity for large operations.
- Social Networks 15%: We are very connected through social networks and if many people use social networks to be interested in bitcoin it can be indicative of interest, and we all know that, if there is interest in a product, there is a greater chance that its price will rise.
- Surveys 15%: alternative.me in collaboration with strawpoll.com, uses surveys to find out what investors think. It is a way of surveying the market.
- Dominance 10%: We can define dominance as the amount of the market that corresponds to a currency. In the case of Bitcoin, which is the largest cryptocurrency, it is very significant. If this dominance rises it is because many people are buying bitcoin and its price rises and if this dominance falls it is because investors lose interest by not carrying out operations.
- Trends 10%: All or almost all of us use Google to carry out searches. This section analyzes search data and determines whether there is a trend or whether investors have lost interest.
This is a superficial explanation of the Bitcoin sentiment index. I do not know what internal calculations they perform.
https://alternative.me/ Chart of the Bitcoin Index over the last three months