The crypto fear and greed index is widely used to track investors’ moods, which slipped into the “extreme fear” range last week (1).
The behavior of the crypto market is highly emotional. People get greedy when the market rises, leading to FOMO, Fear of Missing Out. And people often sell their coins when they see red numbers.
The crypto fear and greed index saves investors from emotional overreactions. Here are two basic assumptions:
- Extreme Fear: It could signify that investors are worried, indicating a buying opportunity.
- Extreme Greed: When investors start to get too greedy, it could mean that the market is expected to a correction.
Below is a chart of the Crypto Fear & Greed Index over the past three months, where a value of 0 represents “Extreme Fear,” whereas a value of 100 indicates “Extreme Greed.”
The trading volume in the crypto market had multiple peaks in 2021; January and February witnessed higher volume than September and October. However, May was the most volatile month.
On 19th May 2021, the 24 hr trade volume in the entire crypto market was worth more than 500 billion USD. About two weeks before the peak, sources claimed that this value was about 4 billion USD; however, there is no clarity on exact figures. Regardless, May 2021 was an eventful month in the history of the crypto market. There was a lot of skepticism around Dogecoin, a meme coin with a high price development until that point (2).
However, later that month, China banned crypto services, which caused a decline in the market cap of the entire crypto market, which could have also pushed investors to purchase new coins (3).
These readings indicate that sellers are going all out, and it spells trouble for a 3 trillion USD market which has witnessed less than usual trading volume (4). The rising concerns about inflation and slower economic growth could lead to a further downtick for crypto over the next year.
Crypto Fear Likely to Increase
Cryptocurrencies had a rough start in 2022, but by the time we reached the end of March, both Bitcoin and Ether, two top cryptocurrencies in terms of the market cap, were witnessing highs not seen since January.
However, the progress seems to have stalled. The total crypto market capital has dropped below 2 trillion USD, and Bitcoin struggles to find support at 40k USD (5). On Friday, the most popular digital asset worldwide was down almost 40% from its November 2021 high of 67,582 USD high.
Consequently, sentiments around the crypto market have also made the worst turn. The crypto fear and greed index, a popular indicator of the crypto investors’ mood, slipped into the “extreme fear” range this week, falling sharply from last month’s reading of 30 to a mere 25 last week.
Since the end of March, the index has seen a dramatic plunge from its 2022’s record high “greed” reading of 60. And leading cryptocurrency experts, including Arthur Hayes, the co-founder of BitMEX, a crypto trading platform, speculates that more downside could be ahead (6).
“Several crypto market pundits believe that the worst is over, but I believe they overlook the inconvenient truth,” wrote Hayes in a blog post (7).
Hayes added that Bitcoin might fall below 25% to a mere 30k USD per coin by June, and Ether is also likely to follow suit, dropping by 16% to 2,500 USD. The downtrodden predictions come since cryptocurrencies are increasingly linked to tech stocks movements (8), which have taken a hit due to the Federal Reserve’s plan to raise interest rates to combat inflation (9, 10).
However, not everyone believes that the market will continue to slip. According to Antoni Trenchev, CEO of Nexo, Bitcoin will jump to 100k USD over the next 12 months as crypto whales like Do Known, the founder of Terra Labs will keep purchasing billions of dollars of the digital currency (11, 12). Kwon had previously argued that Bitcoin could be the world’s reserve currency in the future.
Cathie Wood, Founder and CEO of ARK Investment is even more bullish (13). At the Bitcoin 2022 Miami Conference earlier this month, Wood made a public statement that she sees Bitcoin tapping 1 million USD between 2026 and 2030 as institutional investors rush into the crypto market.
However, as the recent index readings alternating between crypto fear and extreme fear, in the 20 to 30 range, compiled with the Fed’s looming 3.5% interest hikes (14), is likely to induce more fear.
The Correlation with Tech Stocks
The fluctuations in the crypto market are closely associated with tech stocks, and many of them are down 75% from last year’s high (15). And it puts an indent against claims that crypto-assets can act as a wall against losses from other investments (16).
At the same time, however, some cryptos are still considered a safer choice. Bitcoin, for instance, is now the world’s ninth-largest asset with almost a trillion-dollar market cap (17), exceeding both Meta and Berkshire Hathaway.
It gives Bitcoin some level of protection, which is currently absent from more speculative cryptocurrencies.
The valuation of both tech stocks and crypto have become increasingly less dependent on fundamentals, potentially leading to a speculative bubble unless we put some protections in place (18).
Offsetting Crypto Fear
Crypto companies are increasingly getting creative to offset losses in the highly volatile market.
Speculators are using stablecoins linked to dollars to avoid wild swings. However, since traditional stable coins involve centralized entities, they are more vulnerable to economic downturns (19).
That’s where Terra’s successful UST stablecoin enters. It is an algorithmic stablecoin that aims to eliminate risks like regulatory and financial censorship by avoiding non-crypto reserves altogether. It attempts to maintain its dollar peg via a relationship with a fluctuating cryptocurrency, Luna.
A simple explanation would be for every UST built, the same amount of value in Luna tokens is destructed via embedded algorithmic codes to keep UST at 1 USD. High yields from UST deposits seek to attract capital, which can be lent out to general income to pay depositors.
However, this also seems unsustainable because if Luna’s value declines, so will the value of its stablecoin. It has led many market analysts to believe that crypto is merely a game of confidence.
We Could Be Heading Towards Bitcoin Dominance
The Luna Foundation Gaurd plans to keep purchasing Bitcoin, the safest crypto of all, as a backstop to help underpin UST and hold these risks off. It is also acquiring 100 million USD of Avalanche tokens for the same intent. In theory, it will allow Terra to fulfill its goal of offering a truly decentralized stablecoin.
It also suggests that the crypto market might be poised for further Bitcoin dominance since tech stocks and speculative cryptos are the first to suffer in case of an economic downturn.