【Observation】The Crypto Fear and Greed Index reaches single digits, indicating extreme fear, a phenomenon that has only occurred three times before 2020.

The data website alternative.me has recorded the recent price decline. From February 2018 to the end of 2019, the market sentiment index dropped to single digits only three times, indicating "extreme fear." However, in the recent week of 2020, there have been two occurrences (including the situation on the 16th).

The "Fear Index" is a lagging indicator, which is used to show the emotional state of the market after changes in the cryptocurrency market (including volatility, market price changes, and social media tweets). On March 14th, there was once again a single-digit "extreme fear" emotion, which can be explained as a reaction to the significant drop in currency prices on March 12th following the sharp decline in the U.S. stock market.

Observing data from the website, since the records began in 2018 until now, there have only been 4 instances where market emotions reached single-digit levels. (Excluding the current situation on the 16th) We found that before reaching extreme panic emotions, the "percentage of drop from the highest point within a month" is not the main factor of "fear," but rather the "sharp fluctuations."

Four Instances of "Extreme Fear" in History

(1) February 6, 2018, Market Fear Index 8: Bitcoin price at $6,048, previous high within a month at $17,526, a drop of 65%.

Let's review some media reactions, for example, Coindesk's headline: "Breaking 50% Below 2018 Highs"

(2) November 26, 2018, Market Fear Index 9: Bitcoin price at $4,000, previous high within a month at $6,400, a drop of 37.5%.

The headline this time was more alarming, but the short-term drop was not high: "36% Drop: Bitcoin Faces Largest Weekly Decline Since 2013," however, the volatility in the short term was more significant.

(3) August 23, 2019, Market Fear Index 5: Bitcoin price at $10,169, previous high within a month at $12,200, a drop of 16.6%.

This drop was the mildest, but it was also the most pessimistic market sentiment. The media headline was also not optimistic: "Despite Bouncing to $10.2K, Bitcoin Price Still Looks Bearish."

(4) March 14, 2020, Market Fear Index 8: Bitcoin price at $5,469, previous high within a month at $10,300, a drop of 47%.

This was the second-highest drop in currency price recorded by the fear index, but the fear index did not break any records. You can see that the currency price remained at the 9,000-10,000 level for a while, and then dropped significantly to the 5,000-6,000 level. The headline was: "Bitcoin Price Drops to 12-Month Low Overnight."

Emotional Impact: Back and Forth Fluctuations > Major Drops

From the above data, it is clear that the "percentage of drop from the highest point within a month" is not the key factor affecting market sentiment. The drops on February 6, 2018, and March 14, 2020, both exceeded 40%, but did not surpass the emotional index record of the 16.6% drop on August 23, 2019.

Looking at the four instances of currency price fluctuations, on February 6, 2018 (Figure 1), despite the significant drop, it almost glided downward over a month, while on November 26, 2018 (Figure 2), it descended in a step-like manner. On March 14, 2020 (Figure 4), after a long period of stability, there was a significant drop. The fear index was 8, 9, 8 respectively, and the common point among them is that during this month, the currency price was on a downward trend with no significant rebound.

The only difference was on August 23, 2019, where we can intuitively see multiple significant fluctuations in the market trend. Similarly, within an approximately one-month range, there was a tug of war between the nine thousand and ten thousand levels. It may also be because the market was significantly manipulated, leading to the final drop to the nine thousand level, causing the greatest market fear.

In simpler terms, market psychology would rather be "gently killed," "periodically informed," or "killed at once," rather than being "teased and tormented."

In social psychology, techniques of compliance are discussed. The definition of "compliance" is: an individual changes their behavior to meet the expectations of others or groups directly requesting them, or when others imply that the individual can do something. Assuming we consider "compliance" as market sentiment response, and "market price changes" as the demands of the group, it seems to explain the level of market sentiment "compliance."

One of the techniques, the foot-in-the-door technique, involves starting with a small request that the other person agrees to, then gradually increasing one's demands. This way, people are more likely to accept your demands. This is the so-called habituation. We can understand this situation from the example of the gradual downward trend mentioned above.

In 2020, the situation was more like the low-ball technique, where some information was hidden when you agreed, and the complete request was only revealed later. After breaking below 8,000 in early March, with some warnings from the market, following the oil price war and the turmoil in the U.S. stock market, the sudden drop did not break market sentiment records at once. The global market first gave some signals, but the cryptocurrency price had only a slight reaction. When the eruption occurred, the market was more able to withstand the emotions.

One can imagine that the market sentiment reached its lowest point on August 23, 2019, not due to panic from a price collapse, but from negotiation, creating a sense of distrust in the market.

Looking at the fear index from this perspective, it indeed reflects human nature. On the day of submission (the 16th), there was once again a single-digit (9) fear index situation, coinciding with the Federal Reserve announcing another interest rate cut to 0%, indicating that the current international situation is undermining investor confidence.

Further Reading

• "Jack's Trading Room" Perspective on BTCUSD Avalanche Decline
• [Track] What Did Twitter Analysts Say After the Crash on March 12th?

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