Market sentiment determines the thickness of the Wallet? Analysis of catching the bottom and escaping the top based on the fear and greed index

This study explores the threshold effect of the Cryptocurrency Fear and Greed Index (CFGI), analyzing how market sentiment affects BTC price movements. We examine the effectiveness of "buy when you are extremely afraid and sell when you are extremely greedy" and reveal the correlation between different thresholds and investment returns to provide data support for investment decisions. Psychological Thresholds in Cryptocurrency Trading: How Does Fear and Greed Affect Markets? (Background supplement: Building a Web3 project guide turns arrogance, jealousy, laziness, and greed into your on-chain attraction) Summary of Findings This study provides an in-depth analysis of the threshold effect of the Cryptocurrency Fear and Greed Index (CFGI), and the main findings include: The key role of the time horizon: The predictive power of the CFGI threshold is highly dependent on the investment time horizon. Extreme fear may not be a buy signal in the short term, while extreme greed may not be a sell signal in the long term. Complexity of extreme fear: The duration of fear is more predictive than the absolute intensity of fear. Extreme fear for 1-2 consecutive days tends to provide short-term buying opportunities, 3-5 consecutive days signal deeper declines, and more than 14 consecutive days may indicate long-term bottoms. The counterintuitive manifestation of the greed index: BTC's strongest gains tend to be accompanied by a medium CFGI value (around 50) rather than a low CFGI value, unlike the single logic of "buy in fear". Best Threshold Combination: The combination of Fear ≤ 15 and Greed ≥ 90 provides the highest annualized return (62.31%), but trading opportunities are scarce; The combination of Fear ≤ 25 and Greed ≥ 70 strikes a good balance between earnings and frequency of trades. Preface: Investment Value of Sentiment Indicators The cryptocurrency market is known for its extreme volatility. Compared to the TradFi market, digital assets such as BTC often experience violent price fluctuations in a short period of time, and this instability is both an opportunity for investors to chase high returns and a trap that makes countless people lose money. In such an emotional market, the collective psychological state of investors tends to be more indicative of short-term price direction than technical and fundamental analysis. This is also the most basic law of the cryptocurrency market - the price cycle driven by human nature. But the question is: how do we objectively quantify "fear" and "greed"? More importantly, can this sentiment indicator really provide a reliable investment number? This is the background to the birth of the Crypto Fear & Greed Index (CFGI). As a comprehensive multi-data-oriented sentiment indicator, CFGI attempts to quantify the collective psychological state of market participants to inform investment decisions. But as with all investment vehicles, the key question is: Does it really work? This article will take an in-depth look at the practical utility of CFGI as an investment vehicle, with a particular focus on the "threshold effect" of indices – can they provide investors with statistically significant buy or sell signals when the index reaches extreme values? We will conduct a rigorous analysis of the complete historical data from 2018 to 2025 to test whether the widely believed "buy when you are extremely afraid, sell when you are extremely greedy" strategy really works. Read more: Crypto's Narrative Economy — From the Musk Effect to Trump's Family Business Introduction to the Cryptocurrency Fear and Greed Index How does the index measure the "body temperature" of the market? The Cryptocurrency Fear and Greed Index (CFGI) was launched in 2018 with the aim of reflecting the overall emotional state of BTC and the broader cryptocurrency market with a simple numerical value. The index ranges from 0 to 100, where 0 stands for "extreme fear", indicating that investors are very pessimistic; And 100 stands for "extreme greed", which means that the market sentiment is too optimistic. CFGI's calculations are not based on a single factor, but incorporate data from six key dimensions, each given a specific weight: Price Volatility (25%): Comparing the average volatility of BTC over 30 and 90 days, an increase in volatility is often associated with market fear. Market Momentum/Volume (25%): Measures current market momentum and volume, compared to past averages. Social Media (15%): Analyze engagement rates and sentimental tendencies on BTC-related topics on platforms such as X and Reddit. Survey data (15%): Collect data from X polls and other market research. BTC dominance (10%): Monitor changes in BTC's share across the cryptocurrency market, where dominance rise may indicate fear (investors fleeing to the relative safety of BTC). Google Trends (10%): Tracks BTC-related search volumes and search term trends. The comprehensive data of these six aspects is weighted and calculated to form the final index value. Updated every 24 hours, CFGI provides a "daily thermometer" of market sentiment. Status of CFGI Values Index Interpretation: The Meaning Behind the Numbers CFGI's values are further subdivided into five intervals, each representing a different degree of market sentiment: 0-24: Extreme Fear 25-49: Fear 50-74: Neutral 75-94: Greed 95-100: Extreme Greed From an investment perspective, Extreme index values (extreme fear or extreme greed) are often seen as indicators of potential contrarians. When the index falls into extreme fear territory, the market may be overly pessimistic, suggesting that BTC may be undervalued; Conversely, when the index rises to extreme greed territory, the market may be overly optimistic, suggesting that BTC may be overvalued. CFGI vs VIX: Cryptocurrency vs. Traditional Market Sentiment CFGI is often compared to the VIX index of the cryptocurrency market. The VIX index, also known as the "fear index", is a measure of the implied fluctuation rate of options in the S&P 500 index and is widely used to measure the level of uncertainty in traditional stock markets. However, there are significant differences between the two indices in terms of calculation methods and indicators: CFGI vs VIX Comparison Table The sentiment of the cryptocurrency market is more extreme than that of the mature TradFi market. In traditional markets, a VIX over 30 may already be seen as a high volatility alarm; And in the cryptocurrency world, it's not uncommon for CFGI to fall from extreme greed to extreme fear in a month. The extreme fluctuation of this sentiment is both a feature of the cryptocurrency market and a source of potential value for CFGI as investment vehicles. This study will delve into whether this extreme swing of sentiment can really provide investors with statistically significant trading opportunities. Research Methodology: Historical Threshold Performance Review This study is based on data from February 2018 (CFGI launch) to March 2025 and covers multiple bull-bear cycles in BTC. We defined four key emotional thresholds: extreme fear (CFGI ≤ 20), fear (CFGI ≤ 30), greed (CFGI ≥ 70), and extreme greed (CFGI ≥ 80). When CFGI crosses these thresholds, we track the performance of BTC prices over the next 7 days (short-term), 30 days (medium-term), and 90 days (long-term) and calculate three key metrics: median return, win rate (ratio of positive returns), and risk-adjusted returns (ξ = μ/σ) The study found that market sentiment versus the meaning of returns.