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How do you know when to buy bitcoin?
Every investor has their own method. Some look at the Bitcoin network’s fundamentals like transaction volume, number of new Bitcoin wallet addresses, and other factors.
Other people lean on technical analysis, using patterns and trends on bitcoin’s chart to predict where the cryptocurrency’s price is headed.
While I use both fundamental and technical analysis when determining when to buy bitcoin, there’s another factor in my secret sauce…
…and it’s called sentiment analysis.
2022 Was a Rough One
2022 was a tough time to be a crypto investor.
Bitcoin had fallen as much as 76% from its November 2021 highs…
…while many of the “meme coin” tokens from the last cycle like SafeMoon and Dogecoin were down as much as 99%:
The main culprit for this pullback was a general “risk off” investing environment.
Unlike the insane bull run from 2020 and 2021 which was fueled by low interest rates, increased institutional adoption, and retail investors plugging their stimulus checks into the market…
…2022 was the exact opposite. Interest rates were rising at their fastest pace in history, institutional investors were losing money hand over fist, and high inflation weighed on consumer spending.
And then in November 2022, the crypto community got the surprise of their lives when FTX went bankrupt.
“Have Fun Staying… Solvent”
FTX was the world’s second largest crypto exchange until it shocked the crypto world and declared bankruptcy in November 2022.
It was the biggest corporate collapse since Lehman Brothers in 2008, and how it happened was simple:
FTX lent $10 billion of client funds to their trading arm Alameda Research
Alameda used these client funds for high-risk crypto trading but lost it in the crypto bear market
Alameda’s balance sheet leaked showing they were running low on funds causing investors to pull money out of FTX
FTX didn’t have the funds and had to declare bankruptcy
Not only did the company gamble away $10 billion of customer deposits, but some of the world’s more prestigious institutions, hedge funds, and individual investors were duped:
But while the collapse of FTX was a watershed moment in crypto, it was also the sentiment low in the crypto bear market.
Understanding My Secret Ingredient: Market Sentiment
When I say “sentiment low,” it means that peoples’ outlook for the crypto market was at its lowest point.
Crypto had already been in a deep bear market prior to the FTX collapse.
But when the world’s second largest exchange went bust, people thought the crypto market might be dead for good.
When sentiment is at its lowest, investors often sell their assets - in this case crypto - indiscriminately. They have lost so much money that they can’t bear to even look at their accounts. To stop the “pain” they will sell regardless of price.
In the investing world, this stage of the market cycle is known as “capitulation.”
During a “capitluation event,” it’s painful to invest in any market. It seems there is no end in sight, and all you can think of is wanting to get your money back.
But reality, this is the best time to buy. Whether it’s stocks, bonds, or crypto, you will always find the best deals near the sentiment low for any asset class.
That’s why it’s not surprise that the FTX bankruptcy was the sentiment low - and bottom - for the bitcoin bear market.
The Great Bitcoin Bottom of 2022
Legendary investor John Templeton is famous for saying:
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria,”
And the old saw holds true for crypto. Market sentiment peaked after euphoric rise in 2021 with Elon Musk pumping Dogecoin on Saturday Night Live…
…and then died when crypto was at it’s sentiment low in the wake of the FTX collapse.
This is not a coincidence; sentiment peaks and troughs are always near the peaks and troughs for the market cycle.
The trick is being able to recognize where you are in the market cycle.
A Few Tricks of the Trade
I have a few indicators I watch closely to gauge investor sentiment in the crypto market and - by proxy - measure where we are in the market cycle.
The first is the Net Unrealized Profit and Loss (NUPL) indicator. This is a measure of the number of bitcoin currently in profit.
And in previous cycles, it peaked when 75% of recently purchased bitcoin are in profit (i.e. people are feeling very rich)…
…and bottomed when 0% of recently purchased bitcoin are in profit (i.e. people are feeling very poor).
Next, I keep close attention to people’s Google Searches:
When tons of people are searching for bitcoin on Google, it’s usually a good sign we’re near a market peak. For instance, in the previous cycle bitcoin peaked in mid-2021 and - likely - bottomed in November 2022.
This nearly perfectly coincides with Google searches for bitcoin:
The flip side is true too, as markets typically bottom when searches for “bitcoin is dead” or “crypto is dead” see activity:
Lastly, I look closely at general sentiment. Thanks to my 500,000 social media followers I can gauge easily how people are “feeling” about the market.
Judging by some of the comments on my latest bitcoin video…
…people are still pessimistic even after the +85% gain for bitcoin in 2023.
But this begs the question: is now a good time to buy bitcoin?
My Outlook for Bitcoin
I’ve invested in bitcoin since 2017.
I wrote about my experience investing in the crypto space in my 2022 book A Beginner’s Guide to High-Risk, High-Reward Investing.
Based on my background, I’d say we’re currently near the start of a new market cycle:
Does that mean there won’t be short-term pullbacks? Of course there will be, especially after the wild run to start the year.
But even after bitcoin’s latest run, I am not seeing any signs the public is paying attention. This is based on Google searches for “how to buy bitcoin” near a five-year low:
And with the bitcoin halving a year away…
…which has kicked off the last few bull cycles, I could see a new bull run starting early next year.
Just keep in mind investing in bitcoin is highly speculative. Only invest money you can afford to lose. And if your investment is keeping you awake at night, you’ve invested too much.
But according to my analysis, the future for bitcoin looks bright.
Stay safe out there,
Robert