The Crypto Market Is Flashing This Bearish Sign for the Very First Time. Here's What to Do.

When everyone else is screaming that they're selling everything -- or that you're going to be poor forever if you don't back up the truck and buy as much as you possibly can -- the desire to jump on the bandwagon is bound to be strong.

And recently, the crypto market has been flashing one of the most panicked signals it has ever printed. The sentiment-tracking fear and greed index, as assessed by CoinMarketCap as well as other crypto data providers, reached an all-time low of 5 on Feb. 5, indicating extreme fear. As of Feb. 18, it's at 12, another extraordinarily low readout that is almost never seen because of the intensity of the bearishness it signals. Meanwhile, Bitcoin (CRYPTO: BTC), Ethereum (CRYPTO: ETH), and XRP (CRYPTO: XRP) have all taken a severe beating alongside the broader crypto market's decline.

Here's how you should interpret this information, and what to consider doing about it.

Image source: Getty Images.

The temperature is not the forecast

First, let's get some clarity about what the fear and greed index actually is and what it does. It has a range of 0 to 100, with the higher end of the spectrum signifying more intense purchasing activity than selling activity, lower volatility, and more use of options and financial derivatives (which signify a desire to purchase and hold assets), as well as more optimistic discussion about major cryptocurrencies on social media.

While the point of the index is to provide investors with a temperature check, it's important to note that it's just a snapshot at a moment in time, and it probably doesn't have much relevance to prices over the long term. Nor can it tell you how to diversify your crypto portfolio to guard against whatever threats the market is reacting to. So don't read too much into it.

In this case, it's easy to understand why crypto investors are so pessimistic; in the last three months alone, Bitcoin is down by 27%, Ethereum is down by 32%, and XRP is down by 34%, and those crypto assets are among the very strongest and highest-quality in the entire sector. On that note, it's important to recognize that very low fear meter readings often coincide with oversold conditions, which means that prices have fallen so fast as a result of emotional selling that some assets might be significantly undervalued.

What to do now

If you have a high risk tolerance and a multiyear investing horizon, it's reasonable to start nibbling over the next few weeks, especially with Bitcoin and Ethereum. Use small buys spread over time, and assume you might be early.

On the other hand, if you're the type who will panic if the market drops another 10% to 30%, the better move is to hold out, wait for volatility to cool over the next couple of months, and understand that the best time to buy crypto is, in the big view of things, the time when you're going to be comfortable enough to actually hold it for as long as you'll need to get a return.

For everyone, the goal is the same: First survive, then try to thrive as conditions permit.

Alex Carchidi has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and XRP. The Motley Fool has a disclosure policy.