Extreme Fear’ is ruling the Crypto Markets — Is This An Opportunity Or A Warning Sign For Investors?

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The current market sentiment for cryptocurrencies is dipped in ‘extreme fear’ but that’s not necessarily a bad thing. In fact, that attitude is exactly why investors recommend ‘buying the dip’.‘

‘Extreme fear’ is touted as an opportunity to buy cryptocurrencies like Bitcoin, Ethereum, Solana and others at low prices so that once prices recover, investors can sell them off for bigger profits.

The crypto market at large has been bathing in red since the new year kicked off with the first week dragging down the biggest coins by double digits as fear, uncertainty and doubt (FUD) took over the global economy amid concerns of inflation, liquidity and what the US Federal Reserve’s next move is going to be.

And that’s where the Fear and Greed Index (FIG) comes in. It helps one to take a step back, confirm if their sentiment about the wider market is true, and separate the sentiment from the data. The makers of this tool claim that it helps avoid an overreaction.

Fear isn’t always a bad thing

A little fear is good to avoid investments one might regret, but a generalised market-wide irrational fear could sometimes mean the exact opposite — that is, prices that dip can be an opportunity to purchase crypto assets at a lower price than expected. Experienced traders who are willing to wait it out for returns on their investment call this an opportunity to ‘buy the dip.’

Generally, factors driving fear in the crypto market include FUD from news, inexplicable dips in crypto asset price, and historical patterns that failed to manifest such as a ‘Santa Rally’. This time around, the FUD from news has originated from the omicron variant virus of COVID-19, and steps being rolled out by governments to control it — like probable lockdowns and employees being asked to work from again as the pandemic worsens for what seems like the not in time.

Moreover, a ‘Santa Rally’ — indicated by the prices of cryptocurrencies rising for a week at the end of the year until the new year kicks in — has been seen for the last three years but was not seen in 2021-end.Another factor that has been known to trigger fear in crypto markets, and the resulting dips in the prices of cryptocurrencies, is when ‘whales’ or large owners of crypto assets sell a portion of their holdings. In the stock market, it’s when a ‘bear’ or a ‘bull’ decides to sell off their shares.Such transactions by whales have been known to trigger automated buy and sell orders on exchanges, setup by smaller investors.

Index Level Market Sentiment

Under 25 Extreme Fear

26-49 Fear

51-74 Greedy

50 Neutral

75-100 Extreme Greed

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