When to enter the crypto market. Three indicators for buying bitcoin profitably

The material is not an investment recommendation and is published for information purposes only.

May was difficult for the digital currency market. The main causes of instability were the collapse of the TerraUSD (UST) algorithmic stablecoin, followed by Tether (USDT) temporarily losing its peg to the US dollar. Amid high market volatility, bitcoin fell to $26 700 on May 12. Such a figure was observed for the first time since December 2020, then the price of the first cryptocurrency collapsed to the mark of $25 880.

Cryptocurrency analysts began to predict a further decline in the value of BTC. On May 31, the digital asset is trading at $31 599 per coin (as of 2:50 UTC, according to Binance).

Despite macroeconomic worries, some crypto investors consider this to be the best time to make deals. However, the danger of buying an asset that will start to plummet in value usually keeps most traders on the sidelines.

Let's look at three indicators that investors use to find entry points into the crypto market.

Fear & Greed index

The Fear & Greed Index (F&G) is an indicator that measures the overall sentiment of investors in the market. It is measured by a numerical scale from 0 to 100, where 0 stands for “extreme fear” and 100 for “extreme greed.” To determine the index, volatility, market volume, first cryptocurrency capitalization and trends, and social media sentiment are analyzed.

On May 17, the index fell to its lowest level since March 28, 2020. The sentiment indicator reached 8/100 (extreme fear). As of May 31, the F&G was up to 16, which still indicates extreme fear on the part of investors.

Typically, “extreme fear” indicators suggest staying out of the market and preserving capital. However, analysts at Jarvis Labs pointed out that the index can be used as a market indicator. One of the most important factors that can contribute to an index change is the rise in the price of a digital asset.

Jarvis Labs performed backtesting (hypothesis and strategy testing on historical data) to buy an asset when the F&G falls below a certain threshold and then sell the asset when the index value is as high as possible. A value of <10 was chosen for buying, and values of 35, 50, and 65 were chosen for selling points. The results have shown that the best results are given by the option of selling within a narrow time frame when the value of the index exceeds 35. The method provided an average annual return of 14,6% and an aggregate return of 133,4%.

Accumulation of BTC by large holders

Another indicator that signals the emergence of buying opportunities is the behavior of the addresses of major bitcoin holders with a balance of 10 000 coins or more. The number of such addresses has been growing over the past three months, despite market fluctuations (according to Glassnode). The number of addresses with a balance of at least 10 000 BTC is now at its highest level since February 2021.

While many analysts are predicting a further drop in the price of BTC, large holders are betting on a positive future for the first cryptocurrency.

On May 10, about 40 620 BTC ($1,1 billion according to Binance exchange rates as of May 26) were sent to cryptocurrency exchanges. This is the largest inflow of funds to the platforms since December 2019 (according to analytics company Santiment). Most of these funds probably came from the wallet of Luna Foundation Guard (LFG), a nonprofit organization set up to back Terra's ecosystem. On May 10, 28 205,54 BTC were withdrawn from the LFG's backup wallet to support the UST stablecoin's peg to the dollar. However, as early as May 16, the lowest net flow of BTC on the platforms in the last 8 months was recorded.

On May 24, IntoTheBlock CEO Jesus Rodriguez published the results of a study that shows that big BTC investors have increased their holdings by more than 25% in the last 30 days. In addition, there has been a massive withdrawal of funds from exchanges to depository accounts over the past two weeks.

Bitcoin's price drop below the cost of production

Another metric that can give an idea of when and where to buy is the average bitcoin mining cost - the amount it costs a miner to mine 1 BTC.

Bitcoin has been trading at a price comparable to or higher than the cost of production most of the time since 2017 (according to MacroMicro). In this regard, this metric is a good indicator of when buying opportunities arise for the digital asset. In the past, when the BTC rate fell below its average cost of production, it typically did not deviate by more than 10% of its mining costs, and usually regained parity within a few months.

On May 11, bitcoin's mining difficulty reached a record 31,25 T (BTC.com data). Total processing power (hashrate) on the Bitcoin network also updated to a high of 223,70 EH/s. Compared to last year's figures (21,04 T), the difficulty of mining the first cryptocurrency increased by 34%. Then, on May 25, the mining difficulty decreased by 4,33% to 29,9 T and the average hashrate on the network was 213,92 EH/s. This is the maximum decrease in difficulty since July 2021.