To investors,

The timeless finance question of whether prices drive sentiment or sentiment drives prices has now come to the crypto industry.

Krisztian Sandor had a great piece in Coindesk over the weekend that brought this question to the forefront. Sandor writes:

“Crypto investor sentiment cratered to the most negative levels since the tail-end of the 2022 crypto winter as bitcoin's plunge below $54,000 pulled down digital asset markets.

The widely-followed Crypto Fear & Greed Index, created by data source Alternative.me, shows market enthusiasm towards bitcoin and other large cryptocurrencies, with 0 being extreme fear and 100 translating to extreme greed.

The gauge dropped to 29 on Friday, its deepest dive into the fear zone since early January 2023 when bitcoin was trading around $17,000 after 2022's crushing bear market.

The metric notably sent out a contrarian sell signal this past March when it reached the 90 level at near what turned out to be (so far) the 2024 top of the broader crypto market and bitcoin's all-time high of about $73,500. Since then, BTC and ether are 25%-30% lower, while altcoin majors plunged around 50% and smaller tokens lost even more.”

As Sandor correctly points out, the Greed and Fear index perfectly called the local top in March 2024.

The question is what drives these volatile swings in the index?

In the traditional finance world, Fear & Greed indexes for the stock market are almost exclusively driven by quantitative measurements. For example, here is how CNN describes the data sources behind their index:

“The Fear & Greed Index is a compilation of seven different indicators that measure some aspect of stock market behavior. They are market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility, and safe haven demand. The index tracks how much these individual indicators deviate from their averages compared to how much they normally diverge. The index gives each indicator equal weighting in calculating a score from 0 to 100, with 100 representing maximum greediness and 0 signaling maximum fear.”

Compare this to Alternative.me’s data sources for the bitcoin Fear & Greed Index:

1. Volatility (25%)

2. Market momentum / volume (25%)

3. Social Media (15%)

4. Surveys (15%)

5. Dominance (10%)

6. Google Trends (10%)

You can see that about 40% of the data source weighting in the bitcoin version comes from social media, surveys, and Google Trends, rather than traditional quantitative measurements from the market.

I don’t believe either methodology is better or worse, but it is obvious they are different. Crypto tends to have more social conversations than traditional finance, but the legacy market has more structured markets and mature data sources. The truth is that a perfectly designed Fear & Greed index would likely be some combination of these two approaches.

So what does that mean for crypto investors in the coming months?

You should use the Fear & Greed index as one of your data inputs for understanding where we are in market cycles, along with potential buying/selling opportunities. It isn’t perfect but the combination of qualitative and quantitative signals in a market like crypto should be a decent signal when things are getting too crazy and overheated.

Additionally, I continue to see many bitcoiners throwing out wild price predictions measured in hundreds of thousands of dollars. While these predictions are exciting to dream about, I find it highly unlikely. An asset should get less volatile over time as it gets a larger market cap and higher degrees of liquidity.

As I said going into the bitcoin ETF launch, keeping low expectations would be helpful for many people reading this letter.

Happiness is having a small gap between expectations and reality. The lower your expectations, the smaller that gap will be. And if bitcoin decides to surprise everyone to the upside, you won’t be upset about that either.

Fear. Greed. Happiness. The assets may be different in bitcoin and crypto, but human nature remains unchanged.

Hope everyone has a great start to your week. I’ll talk to everyone tomorrow.

-Anthony Pompliano

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