Buying low and selling high is easier said than done, especially when emotion and market volatility are at play. Historically speaking, the best deals are found when there is “blood in the streets”, but the danger of catching a falling knife usually keeps most investors away.
May was a particularly tough month for crypto holders as Bitcoin (BTC) fell to a low of $26,782, and some analysts are now predicting a BTC price below $20,000 in the near future. It is at times like these that fear is endemic as the contrarian investor seeks to establish positions in promising assets before the market comes to its senses.
Here’s a rundown of several indicators that contrarian investors can use to spot opportune times to open positions ahead of the next market-wide rally.
The Crypto Fear and Greed Index
The Crypto Fear & Greed Index is a well-known measure of market sentiment that most investors use to forecast the near future of the market. If viewed at face value only, an “extreme fear” reading, such as the current sentiment, is believed to signal to stay out of the market and preserve capital.
The index can actually be used as a market indicator, a point noted by analysts at cryptocurrency intelligence firm Jarvis Labs.
Rising prices are one of the main factors that can contribute to the rise of the index. Jarvis Labs tested the idea of buying when the index falls below a certain threshold and then selling when it hits 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 selling points.
When this method was tested, the results showed that the shorter-term put option once the index rose above 35, as represented by the yellow line in the chart above, provided the best results. This method provided an average annual return of 14.6% and a cumulative return of 133.4%.
On May 10, the index reached 10 and continued to register a score of 10 or less on six of the 17 days that followed, with the lowest score of 8 occurring on May 17.
Although there is a possibility that the market could drop further in the short term, history indicates that the price and the index will eventually rise above their current levels, presenting a potential investment opportunity for contrarian traders.
Whale Wallet Accumulation
Tracking Bitcoin whale wallets with a balance of 10,000 BTC or more is another indicator that signals when buying opportunities arise.
A close look at the past three months shows that while the market has sold off, the number of wallets holding at least 10,000 BTC has increased.
The number of whale wallets of this size is now at its highest level since February 2021, when Bitcoin traded above $57,000, and these wallets were selling strongly near the top of the market.
While many analysts on Crypto Twitter are calling for a further drop of more than 30% in the price of BTC, whale wallets are betting on a positive future.
Related: 3 reasons Bitcoin is regaining its dominance in the crypto market
Some traders buy when the Bitcoin price falls below its production cost
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 1 BTC.
As shown in the chart above, the price of Bitcoin has traded at or above the cost of production most of the time since 2017, indicating that the metric is a good indicator of when trading opportunities are occurring. generational purchases arise.
A closer look at the current reading shows that the average mining cost sits at $27,644, around $2,000 below where BTC is trading at the time of writing.
Further analysis shows that in past instances where the market price of BTC was below the average mining cost, it tended to stay within 10% of the mining cost and usually managed to regain parity within a few months.
Bitcoin mining difficulty also recently hit a new all-time high, and the market continues to see an upward trend as more industrial-scale mining operations come online. This means that the average mine cost is unlikely to see a significant drop anytime soon.
Overall, the current cost of mining versus the market price of BTC presents a compelling argument for the contrarian investor that the pervasive fear that dominates the market presents an opportunity to be greedy when others Are afraid.
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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 conduct your own research when making a decision.