Yesterday, Bitcoin broke up through resistance at $10,500 and in short order, rocketed another $1000 to a high of $11,419 on Coinbase Pro. Just as fast as the cryptocurrency itself climbed, the crypto market fear and greed index spiked to “extreme greed.”
Greed has now reached the highest level in the crypto market in over a year, hitting a level that hasn’t been seen since past Bitcoin tops. Could the rapid increase in extreme greed be a signal that the current pullback is a prelude to a deeper correction? Or will greed turn into irrational exuberance and push Bitcoin and the rest of the space back towards former highs?
Bitcoin Breakout Rally Leads Market Sentiment Towards Irrational Exuberance In One Day
Cryptocurrencies like Bitcoin have spent the last several years in a bear market, following the crypto market bubble bursting in 2017. It has only been recently that the greater crypto market appears to be ready for a comeback.
The conditions are currently perfect. Entrepreneurs, investors, and analysts alike suggest the limited supply of these assets can make them a great hedge against the dollar.
During the multi-year drawdown, supply heavily outweighed demand, but that’s since been turning around. And coinciding with that shift in supply and demand dynamics is a dollar that’s slowly losing its value.
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The more money the Fed prints, the weaker the dollar gets. At the same time, scarce assets like cryptocurrencies and precious metals have been thriving.
It’s helped Bitcoin this week finally break above $10,500, gold achieve a new all-time high, and the broader crypto market has been pumping left and right.
The sharp markup and profits generated from a single-day $1,500 rally in Bitcoin send the crypto market fear and greed index rising just as sharply as the asset’s price itself.
Bitcoin BTCUSD Crypto Market Sentiment Fear and Greed Index | Source: TradingView
Crypto Market Reaches Extreme Greed, Contrarian Indicator Marked Previous Corrections
Yesterday’s rally caused the crypto market fear and greed index to reach the highest level in over a year, and the highest since the June 2019 top at $14,000.
Prior to that, the only other time greed was higher, was just as Bitcoin began correcting from its all-time high at $20,000.
Crypto Market Fear and Greed Index One-Year Chart | Source: Alternative.Me
Fear and greed can often be used by the best traders and investors as a contrarian indicator. Using such a strategy would involve buying when markets are fearful, and selling when markets are greedy.
Or as the Oracle of Omaha Warren Buffett would put it, “be fearful when others are greedy, and greedy when others are fearful.”
According to the crypto market fear and greed index, it may be time to start being fearful.
Related Reading | How Crypto Market Fear And Greed Be Used Profitably As A Trade Trigger
Data shows that greed reaching such extremes in the past has led to substantial corrections and a fall back into fear. However, Bitcoin has spent nearly three full months trading sideways ahead of the breakout, so the rally could only just be beginning.
If that’s the case, the market is likely to stay greedy and irrational for an extended timeframe. Or as the past has shown, the pullback that started after last night’s rejection from $11,400 may send sentiment back toward extreme fear just as quickly.