The "Fear and Greed" effect, on Binance there is a function that measures the market's greed and fear index. So have you ever learned what greed and fear are? Today, a new friend who joined the market asked me, so I wrote this article.
Coming to the concept first, what is greed? and what is fear? How does its behavior occur? What are its effects?
* Greed
- This is an emotional state that arises when investors see profits or opportunities that could yield profits, making them want to invest in the project.
- Common behaviors/expressions:
+ FOMO buying, causing prices to rise very quickly over a short period.
+ Ignoring potential risks, investing in new hot projects without thorough research.
+ Not taking profits because of the desire and expectation that prices can continue to rise.
- How does it impact? When greed rises, through some of the behaviors mentioned above, it can lead to its value rising too high compared to its actual value, resulting in a 'market bubble'.
* Fear
- This emotional state occurs when a project or something they are investing in is in a sharp decline or there is concern that they will lose part or all of their investment.
- Common behaviors/expressions:
+ Liquidating assets to protect what remains, even if they are unsure if it is just a price correction.
+ Avoiding/fearing investment in new projects due to risk aversion, leading to missed opportunities.
- Impact: contrary to greed, the value of those things will drop to a level too low compared to their actual value.
Entering the cycle of Fear and Greed.
- Greed phase: Investors are optimistic, prices rise, and everyone rushes to buy in.
- Peak phase: Prices reach a high due to greed pushing them up, often with no fundamental support left.
- Fear phase: Prices drop sharply, investors panic sell, and the market falls into chaos.
- Bottom phase: Prices drop excessively, opening up opportunities for savvy investors to return to the market.
* These are the phases where Fear and Greed emerge.
Some real-life examples:
- Greed: During the tech bubble of the late 1990s, investors poured money into tech stocks, leading to market values far exceeding actual values. When the bubble burst, the market collapsed, and many investors suffered heavy losses.
- Fear: During the 2008 financial crisis, investors sold off stocks for fear of losing money, causing stock prices to plummet severely, even though many companies still had strong business fundamentals.
Regarding the Fear and Greed index, this index is calculated from 0->100, with 0-50 representing fear, 50-100 representing greed, and 50 being the equilibrium level.
Ways to remedy
* To mitigate the impact of the 'Fear and Greed' effect, investors should:
- Specific investment planning: Set clear goals, expected profit levels, and stop-loss thresholds.
- Maintaining discipline: Not letting emotions dictate, adhering to the set strategy.
- Assessing the market objectively: Based on data and analysis, not following the crowd.
- Focus on long-term: Instead of reacting to short-term volatility, focus on long-term investment goals.
