Buying low and selling high is easier said than done, especially when emotion and volatile markets are thrown into the mix. Historically, the best deals can be found when there’s “blood in the streets,” but the danger of catching a falling knife usually keeps most investors on the sidelines.
The month of May was particularly challenging 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 term. It’s times like these when fear is widespread that the contrarian investor will seek to build positions in promising assets before the broader market comes to its senses.
Here’s a look at several indicators that contrarian investors can use to spot opportune moments to open positions ahead of the next market-wide rally.
The Crypto Fear & Greed Index
The Crypto Fear & Greed Index is a well-known measure of market sentiment that most investors use to predict the near future of the market. At face value alone, an “extreme fear” gauge, like Current Sentiment, is intended to signal to stay out of the market and preserve capital.
Crypto Fear and Greed Index. Source: Alternate
The index can actually be used as a market indicator, a point noted by analysts at cryptocurrency intelligence firm Jarvis Labs.
One of the biggest factors that can help the index rise is a rise in price. 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 sell points.
Fear & Greed returns for BTC. Source: Jarvis Labs
When this method was back tested, the results showed that the shorter time frame option of selling once the index surpassed 35, as illustrated by the yellow line in the chart above, produced the best results. This method delivered an average annual return of 14.6% and a cumulative return of 133.4%.
On May 10, the index reached 10 and continued to record a score of 10 or below for six of the 17 subsequent days, reaching its lowest score of 8 on May 17.
While it is possible that the market will continue to trend lower in the near term, history suggests 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
Tracking Bitcoin Whale wallets with a balance of 10,000 BTC or more is another indicator that signals when buying opportunities arise.
Number of bitcoin addresses with a minimum balance of 10,000 BTC. Source: Glassnode
A close look at the last three months shows that the number of wallets holding at least 10,000 BTC has increased while the market has been sold out.
Number of bitcoin addresses with a minimum balance of 10,000 BTC. Source: Glassnode
The number of whale wallets of this size is now at its highest since February 2021 when Bitcoin traded above $57,000 and these wallets have been heavily sold near the market top.
While many analysts on Crypto Twitter are calling for another more than 30 percent drop in BTC price, whale wallets are betting on a bright future.
Related: 3 reasons why Bitcoin is regaining its dominance in the crypto market
Some traders buy when the Bitcoin price 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 1 BTC.
Bitcoin Average Mining Cost. Source: MacroMicro
As seen in the chart above, Bitcoin’s price has traded at or above cost of production for most of the time since 2017, suggesting the metric is a good indicator of when generational buying opportunities are emerging.
A closer look at the current reading shows that the average mining cost is $27,644, about $2,000 below where BTC is trading at the time of writing.
Bitcoin Average Mining Cost. Source: MacroMicro
Further analysis shows that in previous cases where the market price of BTC fell below the average mining cost, it tended to stay within 10% of the mining cost and generally managed to regain parity within a few months.
Bitcoin mining difficulties also hit a new all-time high recently and the market continues to see an uptrend as more and more industrial-size miners come online. This means that the average mining cost is unlikely to drop significantly any time soon.
All in all, the current mining costs compared to BTC’s market price make a compelling argument for the contrarian investor that the widespread fear dominating the market presents an opportunity to be greedy when others are fearful.
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The views and opinions expressed herein 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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