Crypto investors are in the greed phase with BTC's upsurge is in full swing, while stock markets drop globally as fears and emotions get the better of fiat traders!
While there is a lot of important concepts in the realm of investing- be it value investing or growth investing, human psychology is equally crucial in trading. The two key emotions that drive the market- fear and greed, have profoundly not only harm many investor portfolios but also crumbled the economy.
“Unless you can watch your stock nosedive by 50% without pressing the panic buttons, then stock market trading is not for you,” Warren Buffet.
There is no better illustration of the effect of these two emotions on investor’s sentiments than the contrasting behavior of traditional stock market traders and crypto investors. They often move in opposite directions. For instance, the fear that led to herd behavior, which saw the massive sell-off of Chinese shares due to the recent coronavirus outbreak, provoked a jump in the prices of major cryptocurrencies in China.
In this article, we have a look at how fear and greed are affecting both stock market traders and the cryptocurrency investors using the Fear and Greed Index in 2020.
The Fear and Greed Index is one of the best concepts for identifying how trade wars, geopolitical tensions, and epidemics such as the coronavirus or swine flu among other factors, affect investor emotions.
Such factors have different effects on stocks and digital currencies. The coronavirus outbreak, for instance, is seen as a risk on traditional financial systems by stock market traders hence the recent fall of stocks in Asia. On the other hand, the outbreak has led to a value gain in decentralized cryptocurrencies.
The CNN Fear and Greed Index has a reading which ranges from 0 to 100. It gauges stock investors’ emotions using indicators such as the stock price momentum or a comparison between the S&P 500 Index and its 125-day moving average. The final index reading is obtained after combining the average diversion of all the indicators. The lower it is at a particular time, the more fearful investors are while a higher reading indicates they are greedier.
For instance, in the first days of January 2020, the final index readings fell in the “Extreme Greed” territory (over 90) compared to the 61 points reading recorded in early January 2019. However, the increase in the reported death toll due to coronavirus in China has seen the index reading fall from over 90 to below 70 by mid- January.
This drop is attributed to a dip in stock prices as investor’s fears keep growing due to the epidemic. Moreover, after the confirmation of a new case of infection in the USA at the end of January, there was a slide in the S&P 500 index rating ranging between “Neutral” and “Fear” at 46 and 44, respectively.
With over 17000 cases of coronavirus confirmed and a death toll exceeding 360 in China, it comes as no surprise that Chinese stock has plummeted quickly. The market reopened on Feb. 3, and the value of almost 4000 shares drop past the daily limit.
Although not all are panicking as Rohit Srivastava seems unmoved by the latest date and time correlation between the coronavirus virus and falling stock prices as per his Tweet below.
The Chinese stock market is not crashed on Coronavirus a some would like to think. Yes it had some bad one days but that is about it. the fall ended this week in a 5 wave decline. The decline itself is wave C of 2 a retracement of wave 1 that marks the start of a trend higher. pic.twitter.com/havRFrmDBX— Rohit Srivastava (@indiacharts) February 7, 2020
As indicated earlier, crypto investors always move in the opposite direction of traditional stock traders. The same was evident on Feb 3 after stock trading resumed in China. While there was a massive sale of Chinese stock, the prices of cryptocurrencies skyrocketed albeit briefly showing the negative correlation between the two markets.
Alternative.me, a platform that helps compare the behavior of crypto investors with that of traditional stock traders, has developed a Fear and Greed Index specifically for the crypto space. The Crypto Fear and Greed Index is produced by analyzing the mood of crypto traders using multiple indicators and compiling data in the crypto space daily.
Some of the indicators it tracks on the large cryptocurrencies include; BTC dominance (10%), Google Trends (10%), Social media (15%), Market momentum, and volume (25%), and volatility (25%). The index uses a similar scale to the CNN Fear and Greed Index (0-100 scale). When the reading is at zero, this means “Extreme Fear,” while at the hundred mark it indicates “Extreme Greed.”
The recent events in China have seen the index reading to rise between 56 and 59 (Greed territory) over the past couple of days. This is about 8 points higher than it was in early January when the index was “Neutral” at 51 points. Besides, this has been rapid rise from a low 15 points on Dec. 18, 2019 (Extreme Fear territory) to this year’s high of 59 on Feb. 3.
Market instability as a result of an epidemic such as the coronavirus outbreak takes investors outside their comfort zones. The volatility in the stock market is what drives the fear and greed among investors.
Extremely risk-averse traders are more susceptible to fear which in some cases can lead to them fleeing the market at the wrong time. For instance, a recent report shows that those who feared the volatility of the Bitcoin and sold out their portfolios early in the 2010s missed out on a great investment. The Bank of America Securities report shows that $1 in Bitcoin invested in 2010 is now worth more than $90,000.
However, fleeing the market early can sometimes save your portfolio. This is evidenced by greedy investors who bought Greek equities at the start of the 2010s. The value of a dollar invested in this market is now worth 7 cents.
These Fear and Greed Indices are a great way of analyzing how economic crises, financial meltdown and epidemics affect the mood and behavior of investors. As the creators of Alternative.me try to explain this scenario:
“The crypto market behavior is very emotional. People tend to get greedy when the market is rising, which results in FOMO. Also, people often sell their coins in irrational reaction of seeing red numbers.”
North American stock markets fall in late-morning trading, loonie down - Toronto Starhttps://t.co/aSUConXLw9— DeskTrading (@desktrading) January 31, 2020
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