When to buy and NOT to sell – the Fear & Greed index
To retail investors, markets can often seem like a wild ride. Especially the cryptocurrency market can show volatility, unlike any other market. This is for several reasons, such as low market capitalization, fewer regulations, or more substantial influence of whales. It can often lead to unexpected price moves that are meant to shake out the “weak hands” and allow more accumulation for the whales. But how can one spot such a movement and resist the feeling of selling during a dump?
You do not lose unless you sell
One of the most known quotes of the legendary investor Warren Buffet goes like this:
When there’s blood in the streets, you buy. Even though this quote is most commonly connected to Warren Buffett, it was credited to Baron Rothschild, the 18th-century banker and one of the richest men of his time. However, in this case, the message of the quote is much more important than the messenger. It clearly described one of the biggest mistakes of retail investors in the markets, which is not buying when the markets are dropping.
What is even more problematic is the fact that inexperienced investors would most commonly sell during times of more significant drawdowns. This is due to a lack of risk management, money management, but also patience or self-confidence. However, the most significant factors are emotions, namely fear and greed. All of these can affect trading and investing strategies, even though they should not. What should the investors and traders do to not only eliminate the losses connected to the panic selling during the price drops in the cryptocurrency market but, more importantly, to take advantage of them?
Dips as a buying opportunity
Even if it looks straightforward and intuitive, the first rule is not selling during the price dips. Unless the price hits the stop loss and automatically flushes the trader out of the trade, no one should try to sell during the price drawdowns. It might not be the best feeling to look at a portfolio that is all in red; however, none of that counts from the long-term perspective. No trader or investor, who has done his due diligence and believes in his investment strategy or research, would want to sell when the price dips.
More importantly, as the above-mentioned quote states, experienced traders and investors take advantage of the presented situation and buy into the markets during the dips. This is something that, for instance, MicroStrategy does almost all the time with Bitcoin. MicroStrategy is the first publicly listed company to put Bitcoin on its balance sheet. More importantly, MicroStrategy has been buying bitcoins during almost every price drawdown this cryptocurrency has seen in the last year. It also did so a few days ago, when the CEO of MicroStrategy, Michael Saylor, announced that MicroStrategy has bought 7 0002 BTC and now owns more than 121,000 BTC.
The more extreme case can now be seen with the president of El Salvador, Nayib Bukele. He has been buying Bitcoin for this Latin American country ever since Bitcoin became legal tender in it. On the 26th of November, which was coincidently Black Friday, when Bitcoin saw a price decline of around 9%, Nayib Bukele tweeted the following:
El Salvador just bought the dip.
100 extra coins acquired with a discount 🥳#Bitcoin 🇸🇻
— Nayib Bukele 🇸🇻 (@nayibbukele) November 26, 2021
Buying the dip is something that every investor and trader wants. Since trading is as simple as “buy low, sell high,” buying in the dip provides the ultimate opportunity for increasing the risk-reward ratio and thus the potential of the whole trade. “Buy low, sell high” might sound simple, yet the execution is challenging since no one can predict the future.
That is why investors and traders use different indicators, graphs, charts, analytics, and many more. It, however, does not need to be as complicated as having professional algorithms and analysts or spending 16 hours a day looking for signals. In the cryptocurrency world, one index is extremely helpful in showing the overall market sentiment and can help traders or investors adjust their strategies accordingly.
Fear & Greed Index
The name of that index is the Fear & Greed Index. While this index is not anything new in the financial world, cryptocurrency analysts tend to use it fairly often to get the hang of the current market sentiment. Moreover, it is straightforward to understand and read. It shows the sentiment on the market measured on a scale from 0 (the extreme fear) to 100 (the extreme greed).
The index itself consists of different aspects of market fitness. It looks at volatility in the market, the momentum/volumes, social media interactions, various surveys, the dominance of Bitcoin, and different trends, such as Google trends for Bitcoin.
Fear & Greed Index and current sentiment
For instance, at the time of writing this article, the value of the Fear & Greed Index was around 40, which indicates slight fear. However, on the 27th of November, a day after Black Friday, the value of this index was 21, which shows extreme fear.
Last time the index saw similar values was at the end of September. On the 21st of September, the Fear & Greed Index flashed a value of 22, which again indicated extreme fear in the market and was in line with the price of Bitcoin of 39,600 dollars. Bitcoin has not looked below this price since then, showing that the price dip that occurred during that time presented a solid buy opportunity.
Helpful, but not ultimate
The power of this index should not be overestimated. It definitely does have some informational value, yet, trading or investing solely based on this indicator would not be smart at all. But, even the description of the Fear & Greed Index contains the following:
“Extreme fear can be a sign that investors are too worried. That could be a buying opportunity. When investors are getting too greedy, that means the market is due for a correction.”
This is in line with the words of Warren Buffett and Baron Rothschild. Warren Buffett even had a better quote that is much narrower than the first one, and it suits this topic well:
Be fearful when others are greedy. Be greedy when others are fearful.
However, if you are unsure when to buy or sell or whether others are greedy or fearful, we are here to help you.