Previously, Xiaobian introduced to you what is the fear and greed index of cryptocurrency. The fear and greed index of cryptocurrency is a quantitative indicator that reflects your current sentiment on the cryptocurrency market. However, some investors have questions. Is the fear and greed index of cryptocurrency reliable? How to use them to make investment decisions? Next, let's take a look.

Is the fear and greed index of cryptocurrency reliable?

Over the years, the fear and greed index has shown impressive accuracy, which is related to its ability to correctly represent investor sentiment with data and proportion. The accuracy of the index in terms of price development depends entirely on the investors' response to the data provided by the index. Therefore, fear and greed have a strong correlation with price development.

Historical statistics show that when the asset value decreases, the value of fear and greed index decreases (fear), but when the asset value increases, the value of fear and greed index will decrease. This kind of direct correlation is easy to change, but it does not necessarily reflect the accuracy of the index itself. Because the fear and greed index only considers market sentiment, not its correlation with the value of encrypted assets. When considering the stability of the fear and greed index, these two conditions (market sentiment and the value of encrypted assets) should be called "separate".

When using the fear and greed index as a trading indicator, some precautions must be kept in mind. Identify several important links for yourself:

1. Am I a trader or a long-term investor? If you are a trader who often moves between cryptocurrency positions, it may be helpful for you to know more about the index value. If you are a long-term investor, active trading may cause you to miss the important rebound, which will ultimately reduce your total return.

2. Have I considered the tax policy on cryptocurrency? If you actively trade, whether it is daytime trading or fluctuating trading BTC based on technical indicators such as fear and greed index, you are more likely to pay short-term capital gains tax (the same as income tax) on profits. This must be taken into account when conducting transaction selection.

3. Am I a technical trader or a fundamental trader? Performance indicators include fear and greed index. It ignores all basic factors of cryptocurrency in the final export. For example, if you invest in cryptocurrency based on the macroeconomic outlook, you think that the fear and greed index has nothing to do with your investment theme.

How to use fear and greed index to make investment decisions?

Cryptophobia and greed indicators help investors decide when to trade cryptocurrencies. For example, if the index falls, it means there is risk in the market. In this case, investors may transfer their/her funds to safer safe havens such as gold. In the encryption industry, others may need to buy stable currency to maintain their net assets.

If the market is extremely panicky, it should be the good luck for investors to buy and hold on the bargain and wait for the asset appreciation. If the price of cryptocurrency rises, the investment will generate profits.

On the contrary, extreme greed shows the probability of price reversal. In this case, the possibility of property prices falling is very high. Therefore, selling property is good luck.

Having said that, I believe you have a certain understanding of the reliability of the fear and greed index of cryptocurrencies and how to use them to make investment decisions. In general, the fear and greed index is an important indicator of market sentiment. Investors can predict when prices will fall and rise. Generally, traders will sell their cryptocurrency when the market is extremely greedy. When the market panics, they can buy and hold in order to increase the price in the future.