Frequently Asked Questions (FAQs)
What is the market capitalization for crypto?
The total market capitalization of crypto is the real-time calculation of all coins and tokens listed by crypto price tracking websites. Assets such as NFTs and metaverse land are not currently included in the calculations of any major crypto price services.
Why is market cap important?
The overall market cap of crypto is important for investors to understand the general sentiment of the market, either up or down. It is also a useful way for users and investors to understand the level of growth and adoption of cryptocurrencies.
What is the volume in crypto?
Trading volume is normally shown as two related charts. One shows the total number of transactions in a given time period, which is normally 24 hours. The other shows the total financial value of coins or tokens traded, which is normally denominated in US dollars.
Why is volume important?
For liquid traded assets, including cryptocurrencies, volume is used as a way to help confirm trading patterns. Price movements - both up and down - that are backed by above average volume are seen as being more important and stronger signals of market sentiment.
What is Bitcoin (BTC) dominance?
Bitcoin (BTC) dominance is a metric used to measure the relative market share or dominance of Bitcoin in the overall cryptocurrency market. It represents the percentage of Bitcoin's total market capitalization compared to the total market capitalization of all cryptocurrencies combined. Since Bitcoin was the first asset, it has remained the largest by market cap, which is why its dominance in the market is a number that many people follow. We describe the assets tracked in this chart as cryptoassets because it includes tokens and stablecoins, not just cryptocurrencies.
Why does the Bitcoin (BTC) dominance matter?
The Bitcoin (BTC) dominance metric is considered important for several reasons:
- • Market direction indicator: Bitcoin dominance can be used to understand market sentiment. When BTC dominance is high, it generally implies that investors are more confident in Bitcoin relative to other cryptocurrencies. This can be during times of market uncertainty or volatility, when investors may see Bitcoin as a 'safer' bet because of its larger size and more established reputation. Conversely, when BTC dominance is low, it could mean that investors are more willing to take risks on other, potentially higher-reward cryptocurrencies.
• Asset diversification: For investors, understanding Bitcoin dominance can help guide decisions about diversifying their portfolio. If Bitcoin dominance is high, they might consider diversifying into other cryptocurrencies to reduce risk. If Bitcoin dominance is low, they might see this as an opportunity to invest in Bitcoin.
• Market maturity indicator: Bitcoin was the first cryptocurrency and for a long time, it completely dominated the market. However, as the cryptocurrency market matures, many other crypto assets have been developed with unique features and use cases. Therefore, a decline in Bitcoin dominance over time is seen by some as a sign of the cryptocurrency market becoming more mature and diverse.
• Trading strategy: Traders often look at Bitcoin dominance to decide whether to invest in Bitcoin or altcoins (all other cryptocurrencies). When Bitcoin dominance is increasing, traders might move their assets into Bitcoin expecting it to outperform altcoins. Conversely, if Bitcoin dominance is decreasing, traders might move their assets into altcoins expecting them to provide higher returns.
It's worth noting, however, that while Bitcoin dominance can provide some insights, it's not a definitive guide to investment strategy or market health. The cryptocurrency market is influenced by many complex factors, and Bitcoin dominance is just one part of the picture.
How does this index determine the fear and greed level of the market?
The index uses multiple key components to provide valuable insights into market sentiment:
1.Price momentum: It analyzes the price performance of the top 10 crypto coins (excluding stablecoins) by market capitalization, including BTC, ETH, XRP, BNB, and DOGE, in order to capture the trends across a broader range of assets.
2.Volatility: The index incorporates the Volmex Implied Volatility Indices, BVIV and EVIV, which provide forward-looking measures of annualized expected volatility over 30 days for BTC and ETH.
3.Derivatives market: The index uses Glassnode Options Open Interest Put/Call Ratio data on Bitcoin and Ethereum options contracts to indicate investor sentiment over a moderate time frame. A higher ratio of puts to calls indicates fear, suggesting bearish expectations.
4.Market composition: The relative aggregate value of BTC in the market serves as a vital indicator of market sentiment. The stablecoin supply ratio (SSR) is employed for this purpose, measuring the ratio between Bitcoin's market capitalization and the total market capitalization of major stablecoins.
5.CMC proprietary datanswer: The index analyzes social trend keyword search data and user engagement metrics to gauge market sentiment, retail interest, and emerging trends. This information identifies the coins and projects generating the most interest and the themes driving market sentiment.
How can I use the CMC Crypto Fear and Greed Index?
The fear & greed index is utilized to assess the mood of the market. It serves as a sentiment indicator that helps users get a sense of the emotional biases of the overall market, helping them make more objective decisions. When combined with other analytical tools, the Index becomes a valuable resource for gauging market sentiment and making informed choices.
What is open interest?
Open interest (OI) is the total value of outstanding derivative crypto contracts that have not been settled yet. These derivative contracts could include perpetual contracts, futures contracts, options contracts, or other types of financial instruments that derive their value from an underlying cryptocurrency, such as Bitcoin or Ethereum.
Open interest is a key metric used by traders, analysts, and investors to assess market sentiment and to gauge the liquidity and overall interest in cryptocurrency derivatives. It is important to understand that open interest is not the same as trading volume. Trading volume represents the total number of contracts traded during a specified period, whereas open interest represents the total number of contracts that are still active and have not been offset by an opposite trade.
Why does open interest matter?
The relationship between open interest and price movement can provide insights into market trends. For example, if open interest is increasing along with rising prices, it may indicate that new money is flowing into the market, and there is bullish sentiment. Conversely, if open interest is decreasing while prices are falling, it may suggest that traders are unwinding their positions, possibly indicating bearish sentiment.
Traders also pay attention to changes in open interest, as significant increases or decreases can signal potential shifts in market sentiment and the potential for increased volatility.
Overall, open interest is an essential data point for understanding the derivatives market and can provide valuable insights for traders and analysts in the crypto space.
What is implied volatility?
Implied volatility (IV) is a measure of the expected future volatility of an underlying asset, such as Bitcoin or Ethereum. It is derived from the prices of options contracts and reflects the market's expectations of how much the asset's price will fluctuate over a certain period of time. IV is often referred to as the "fear gauge" because it is believed to indicate investors' sentiment and uncertainty about the future price movements of the asset. It is an important concept in options trading and can be calculated using different methodologies, such as model-dependent or model-free approaches. The Volmex Implied Volatility Indices use a model-free approach to calculate the IV of crypto assets and provide forward-looking market views expressed as an index. Details of the methodology can be found here
Why does implied volatility matter?
Implied volatility is a crucial factor in understanding market expectations and sentiment. It reflects the collective view of market participants regarding potential future price movements of an asset. It plays a vital role in pricing options, with higher implied volatility leading to higher option prices due to increased uncertainty and potential for larger price swings. Additionally, implied volatility is essential for risk management, enabling traders to assess and adjust their risk exposure. Traders can also use implied volatility to develop trading strategies, looking for discrepancies to profit from expected corrections. Moreover, implied volatility serves as an input for forecasting future price movements, helping traders make educated guesses and adapt their strategies accordingly.
