Solutions for cycle-based investment strategies

Is the crypto fear and greed index a valuable indicator for long term investments?

A lot of long term investors rely on the data of the daily actualized greed and fear index by alternative.me to evaluate the sentiment of the crypto market. The greed and fear index is composed of Volatility (25%), Market Momentum / Volume (25%), Social Media (15%), Surveys (15%) (paused), Dominance (10%) and Trends (10%). This emotion based indicator informs investors to “be fearful when others are greedy and to be greedy when others are fearful”, in other words sell when others are greedy and buy when others are fearful.

The limitations of the Fear and Greed indicator become obvious for the last BTC cycle:

Bitcoin price chart with Fear and Greed Index indicators, showing maximum greed at market cycle tops in red and maximum fear at cycle bottoms in green, annotated with arrows and labels.

  • High level extreme greed value (94, 95) were indicated on 19th November 2021 with a value of 94, before a final run of additional 250% to the top. An investor would have taken profits too early. 

  • A period of low level extreme fear values (< 11) was indicated in May 2022. After which the price dropped by another 40% by November 2022. An investor would have bought back in too early. 

As you can read in the blog section, I experimented to improve strategy with the fear and greed index. But I also asked myself is there potentially a different approach:

Can we develop an indicator, which reflects the social interest ?

Yes, and there are sources available such as the block and social blade which collect social media data for the interest in crypto.

With people spending more time online than in real life, online data became representative for public interest trends. I developed and implemented a weekly indicator which measures the engagement of retail investors:

Bitcoin price chart with weekly buy and sell signals

Strengths of the developed Social Interest indicator:

  • The buy back investments in bear trends during high fear levels are skipped

  • Low public interests coincide almost with the bottom of the cycles

  • In bull runs the run up time for the indicator signal of public obsession appears at a later stage than in the fear and greed index, therefore higher profits would have been achieved with this indicator in the last cycle

Limitation

  • Only suitable for assets with measurable public interest, not applicable to new listings

Average allocation recommendation:

Allocate your investments in 20% proportions when buying and selling.

Disclaimer: This site is not financial advice, for educational purpose on engineering codes only.