Buying low and selling high is easier said than done, especially when the emotion and volatility of the markets come into play. Historically, the best opportunities are found when there is “blood on the streets”, but the danger of catching a falling knife tends to keep most investors on the sidelines.
The month of May has been especially difficult for crypto holders as Bitcoin (BTC) fell to a low of $26,782, and some analysts are now predicting a price below $20,000 for BTC in the near future. At times like this, when fear runs rampant, the contrarian investor looks to open positions in promising assets before the broader market comes to its senses.
Below are several pointers that contrarian-minded investors can use to spot the opportune times to open positions before the next market rally.
The Crypto Fear and Greed Index
The Crypto Fear and Greed Index is a well-known metric of market sentiment that is used by most investors to predict the near future of prices. Taken purely at face value, an extreme fear reading like current sentiment is a signal to stay out of the market and preserve capital.
The index can be used as a market indicator, as analysts at cryptocurrency intelligence firm Jarvis Labs suggest.
One of the main factors that can help the index rise is an increase in price. Jarvis Labs has tested the idea of buying when the index falls below a certain threshold and selling when it reaches a predetermined high.
For this test, an index score of 10 was chosen for the low threshold, while scores of 35, 50, and 65 were chosen as the selling points.
When this method was tested, the results showed that the shortest option to sell once the index was above 35 points, represented by the yellow line in the chart above, provided the best results. Using this method provided an average annual return of 14.6% and a cumulative return of 133.4%.
On May 10, the index hit 10 and continued to score 10 or below on 6 of the following 17 days, with the lowest reading of 8 recorded on May 17.
Although the market may continue to decline in the short term, history indicates that both the price and the index will eventually rise above their current levels, presenting a potential investment opportunity for contrarian traders.
Accumulation of whale wallets
Keeping a close eye on Bitcoin whale wallet activity with a balance greater than 10,000 BTC is another indicator of when buying opportunities arise.
A detailed analysis of the last three months shows that, while the market has continued to sell off, the number of wallets with more than 10,000 BTC has been increasing.
The number of whale wallets of this size is now at its highest level since February 2021, when Bitcoin was trading above $57,000, and these wallets were selling strongly near the market high.
While many analysts on Crypto Twitter are calling for another 30%+ drop in BTC price, whale wallets are betting on a positive future.
Some traders buy when the price of Bitcoin falls below its cost of production.
Another metric that can provide insight into when and where to buy is the average Bitcoin mining cost, which is the amount of money it costs a miner to mine one BTC.
As seen in the chart above, the price of Bitcoin has traded at or above the cost of production for most of the time since 2017, indicating that the metric is a good indicator of when generational buying opportunities arise.
A closer look at the current reading shows that the average cost of mining stands at $27,644, some $2,000 below the current BTC price.
Further analysis shows that in previous cases where the BTC market price fell below the average mining cost, it tended to stay within 10% of the mining cost and typically managed to regain parity within a few minutes. few moths.
Bitcoin mining difficulty has also recently reached a new all-time high, and the market continues to see an upward trend as more industrial-sized mining operations get underway. This means that the average cost of mining is unlikely to see a significant drop in the short term.
Taken together, the current cost of mining compared to the market price of BTC makes a compelling case for the contrary investor, as the widespread fear that dominates the market presents an opportunity to be greedy when others are fearful.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should do your own research when making a decision.
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