This analysis explores the correlation between the Fear and Greed Index (FGI) and the Bitcoin chain. The Bitcoin Fear and Greed Index serves as a valuable tool for gauging market sentiment toward Bitcoin. The emotions of investors significantly influence the decision-making process for buying and selling cryptocurrencies, including Bitcoin.

While this index is not directly related to on-chain activities, the objective is to investigate whether changes in the FGI have any impact on the Bitcoin chain.

The chart below displays the Fear and Greed Index from January 2021. If the FGI falls below 20, it indicates Extreme Fear, below 40 is Fear, below 60 is considered neutral, below 80 is Greed and anything above 80 represents Extreme Greed.

The price movements of cryptocurrencies can be influenced by emotions such as fear and greed. When fear is high, it can lead to panic selling and substantial price drops. On the other hand, extreme greed can trigger a buying frenzy, propelling prices to soar rapidly.

The chart below illustrates a notable correlation between FGI and the price of Bitcoin. Both FGI and BTC price appear to move in tandem, demonstrating a pattern where the FGI decreases when the BTC price drops, and conversely, the FGI increases when the BTC price rises.

The Fear and Greed Index can impact chain activities within BTC. During periods of fear, there might be increased movement of BTC as users attempt to minimize their exposure to risk. They may choose to swap their BTC for more stable coins or fiat currencies, necessitating the sending of BTC to CEXs to facilitate these swapping activities. Conversely, during periods of greed, users may engage in increased trading and swapping of BTC, potentially leading to higher transaction volumes on the Bitcoin chain. The Fear and Greed Index can therefore play a role in influencing the overall blockchain activity related to BTC transactions.

Addresses

In the chart below, we observe the correlation between addresses and the Fear and Greed Index (FGI). It is evident that the number of addresses remained relatively stable despite fluctuations in the FGI. However, an interesting anomaly occurred in May 2021 when the FGI decreased from 43 to 22, leading to a decline in the number of addresses on BTC from 4.5M to 3M.

This result seems to contradict the usual relationship between FGI and its impact on user activity. Normally, a decrease in the FGI would be expected to correspond with an increase in user activities.

Transactions

Over time, transactions and wallet addresses have shown relatively stable patterns regardless of the ranged Fear and Greed Index (FGI). However, in recent months, significant changes have been observed. As the price of BTC increased and Ordinals was launched on the BTC, the number of transactions experienced a notable surge. Following this surge in transactions, the Fear and Greed Index also increased, indicating a possible connection between increased activity on the blockchain and investor sentiment.

BTC Amount

Analyzing the Output Value in BTC, it becomes evident that there exists a moderate correlation between the transferred amount and the Fear and Greed Index (FGI). Notably, after June 2021, a significant change occurred when the FGI dropped from 83 to 25. Following this decline, there was a consistent increase in the weekly BTC amount, and this trend persisted until October 2022. However, after the FGI increased to 58, there was a marked drop in the weekly BTC amount.

Fees

Fees are not directly correlated with the Fear and Greed Index (FGI). However, Bitcoin transaction fees can be influenced by factors such as network congestion and the block size limit.

To explore any potential insights, we can examine the relationship between average and total paid fees in relation to the Fear and Greed Index (FGI) in the below charts.

Note: I utilized the Fear and Greed Index (FGI) data from the source https://dune.com/kwizzles/btc-fear-greed, which covered the period up until May 2023. To complete the analysis until July 20, I manually gathered the FGI data for the remaining period.

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