Now that the dust has settled after the historic cryptocurrency market collapse earlier this month, alongside the stock market, gold and many other traditional assets, Bitcoin and altcoins are starting to recover.
But while cryptocurrency prices are rebounding widely, according to the cryptocurrency market's Fear and Greed Index, sentiment is still in extreme fear.
Does this mean that it is time to be greedy while the market is scared or is fear so extreme that taking on a new position is too dangerous?
Also read: How to lose the fear of investing
Market recovers, but feeling is of fear
Since cryptocurrencies are highly speculative assets and many of their valuations are derived from exaggerations and promises, investor sentiment is especially important.
And because it is such an important factor, the Fear and Greed Indicator was designed to track investors' feelings and help traders gain a better perception of the market.
The index is usually so accurate in representing the emotional state of the market, that it has been used successfully as a trading strategy.
Often, assuming a position contrary to the market, huge profits can be obtained. As Warren Buffett's famous saying goes, it is wise to be afraid while others are greedy and to be greedy when others are afraid.
And with the market with such extreme fear, this old saying suggests that the time for Bitcoin is now.
Coronavirus was a black swan event that caused mass deaths and resulted in people being quarantined; now the whole world is terrified not only of the pandemic, but of the possible economic consequences that can last for decades.
As the fear is extreme, both inside and outside the cryptocurrency market, it is prudent to be more cautious when considering investments or trades at this time, and additional risk management strategies should be applied.
Coronavirus causing extreme fear means investors should be cautious
In spite of everything, reaching an extreme fear does not always coincide with a price increase afterwards. The last time the fear was so extreme, was in August 2019, when Bitcoin was trading above $ 10,000. In the following month, Bitcoin fell to $ 8,000.
This fall did not even bring back the feeling of extreme fear that was only a month earlier, despite one of the biggest falls of the year having occurred.
What is undeniable, however, is that extreme fear can cause investors and markets to react irrationally. And since there is a lot of unpredictability due to the coronavirus, it is better to pay attention to safety and proceed with caution.
Continue reading: Dow Jones has the biggest increase since 2008, Ibovespa and Bitcoin rising – Time to turn?