The volatile nature of bitcoin has helped the cryptocurrency cement epic gains since its founding in 2009, but not all investors have been able to weather its insane price swings.
Bitcoin has jumped 67% since the start of the year, even after experiencing a 54% drop from the April peak. To better resist the volatility of bitcoin, Fundstrat’s Tom Lee has compiled the 5 rules to follow that investors should keep in mind when investing in bitcoin.
These are the 5 rules to follow when investing in bitcoin, according to Tom Lee of Fundstrat.
1. The United States is the future of bitcoin.
It’s about the adoption of crypto in America over the next several years, given that the country accounts for a large chunk of the world’s wealth, according to Lee.
According to the Bitcoin Market Potential Index, the United States is ranked fifth overall and is the only large country in the top 10. If bitcoin is to be successful, it must be successful in the United States.
Lee pointed out that a massive transfer of wealth from baby boomers to millennials will be worth nearly $ 70 trillion over the next 20 years. Some of this wealth transfer could turn into bitcoin as millennials are more open to crypto than baby boomers.
2. The consensus is generally fair, so follow the Bitcoin Misery Index.
Market sentiment and securities prices go hand in hand, which is why its major crypto investors are monitoring sentiment indicators for bitcoin. Rising bitcoin sentiment is often correlated with strong six-month forward returns, while falling sentiment is a sign that increased volatility may soon return.
3. Buy bitcoin when it exceeds its 200-day moving average.
Every time bitcoin broke its 200-day moving average, it delivered solid returns, with a six-month average return of 193% and a success rate of 80%, according to Lee.
âThe 200-day moving average is important because it reflects the long-term trend in prices and it’s also basically where most holders have gained their security,â Lee explained.
Bitcoin broke its 200-day moving average earlier this month, and since then the cryptocurrency has risen by more than 8%.
4. Bitcoin is a risky asset.
“Bitcoin works best when the S&P 500 is performing very well,” according to Lee. This means that bitcoin is likely viewed as a risky asset by investors.
The biggest returns for bitcoin have come during the strong years for the equity market, giving both asset classes a positive correlation.
âDoes that mean bitcoin is a risky asset? Maybe. But we think the best explanation is that bitcoin performs best when there is a clear macro trend,â Lee explained.
5. HODL because the 10 best days generate most of the returns.
âThe reason ‘buy and hold’ (or HODL) makes sense for bitcoin is that a handful of days each year accounts for the bulk of the gains for bitcoin,â said Lee.
Bitcoin was declining, on average, every year if you exclude the top 10 daily percentage gains of the cryptocurrency, according to Fundstrat.
âEx-top 10 days, bitcoin declined 44% per year between 2013 and 2019,â Lee said. Given how difficult it is to consistently time the ins and outs of bitcoin, buying and holding is a better strategy, according to Lee.
Lee remains bullish on bitcoin and believes the cryptocurrency could hit $ 100,000 by year-end.