A crypto ‘fear and greed’ indicator is flashing a warning signal that shows investors are being extremely greedy as top cryptocurrencies hit record highs

• A crypto “fear-and-greed” gauge that tracks investor sentiment flashed a warning sign on Tuesday.
• The index showed investors are showing extreme greed, indicating a market correction is due.  
• This index last reached the same level on January 6, right before bitcoin’s previous record high.
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As the price of top cryptocurrencies hit all-time highs on Tuesday, a key sentiment index showed that crypto investors are displaying extreme greed.

A “crypto fear and greed” index, a metric published by Alternative.me, rose from 83 to 95 on Tuesday, suggesting a level of “Extreme Greed.” Similar to other gauges that track fear on traditional stock markets, this crypto index uses a number of metrics to measure investor sentiment from a scale of zero to 100, ranging from “Extreme Fear” to “Extreme Greed”.

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The tool measures two primary emotions that influence how likely investors are to purchase cryptocurrencies: fear and greed. Extreme fear is indicative of investors being too worried, meaning they are more likely to retreat from the market, prompting prices to fall and that could mark a good time to buy, according to Alternative.me. On the other hand, when investors get too greedy, this could indicate cryptocurrency prices are due for a correction.

The index last reached the same 95 level on January 6, just two days before bitcoin hit its first record high of the year near $41,000. In due course, the price toppled to as low as $28,750 by January 21.

Factors used in the index’s measurement include current volatility, market volume, sentiment analysis on social media, market cap share, and Google trends data.

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On Tuesday, Bitcoin hit a fresh high of $48,000 after Tesla’s $1.5 billion investment in the token, ethereum soared past $1,800 for the first time ever, and Dogecoin jumped 7% to $0.07.

While Tesla shareholders are reacting positively to the news, it remains to be seen how shareholders would react if a decline in bitcoin’s price negatively affects Tesla’s future earnings, said Jerry Klein, managing director at Treasury Partners.

Separately, billionaire Mike Novogratz said Monday that he thinks bitcoin will more than double to $100,000 by the end of 2021.  Meanwhile, cryptocurrency analysts expect Tesla’s purchase to reassure retail and institutional investors about adding or holding cryptocurrencies.

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