As the price of Bitcoin gains momentum with attempts to break the $60,000 mark, the asset fear and greed index is also increasing, potentially pointing to the cryptocurrency’s next price movement.
Between July and October 13, 2021, Bitcoin’s fear and greed index had surged 366% from 15 to 70. With the fear and greed index tool, zero translates to ‘Extreme Fear’ while the value of 100 represents ‘Extreme Greed.’
Last week, the Bitcoin index had entered the ‘extreme greed’ territory with a score of 76, the highest level since early September, which preceded a sharp sell-off in Bitcoin. By press time, the asset was trading at $57,600.
With Bitcoin prices surging in recent days, many investors are joining the market as the fear of missing out sets in, highlighting the emotional aspect of the crypto market. The index, however, helps in measuring and mitigating any emotional overreactions and judging market sentiment.
The recent rally has been attributed to speculation that the U.S. Securities and Exchange Commission (SEC) will finally approve a Bitcoin exchange-traded fund (ETF). However, there is still skepticism that approval will have a beneficial effect on the asset’s price.
Will Bitcoin correct soon?
With the index largely skewed towards the greed section in recent days, it is uncertain when the fear will start creeping in. This indicates that Bitcoin may be on the verge of a short-term correction, having tested the extreme greed territory. When the index nears 100, there is a likelihood that the market will correct thanks to a wave of selling which drags the price down.
Worth noting is that the index reached these levels back in December 2017 and January 2019. It was later followed by a massive collapse and a general depressing crypto season, which lasted almost a year before surging again in 2020.
Notably, the fear and greed index is based on a combination of data points, including volatility, social media, and Google trends. The data allows evaluating the aggregated market sentiments.
In this case, rising greed can result in the overpricing of the cryptocurrency, while rampant fear can drop the price down to the undervalued zone.
With the fear recorded in July, the asset price had corrected significantly amid an increased regulatory crackdown led by jurisdictions like China.