Bitcoin: Here's when to Accumulate

3 thg 7, 2022

I was asked to share my Bitcoin accumulation indicator on here.

How I created this is a bit complicated, but in short, this chart shows the price action of Bitcoin adjusted by the performance of the S&P 500. I use the 20-month EMA as my accumulation signal. For those who want more details, see below.

Each time the adjusted price action of Bitcoin falls below the white line into the green zone, I accumulate Bitcoin. Rarely is this indicator triggered, but when it has been triggered, the one-year returns have been incredible. The one-year return is calculated from the bottom of the candlestick that crosses the white line to the top of the candlestick 12 months later.

When accumulating an asset, or averaging down, always remember these rules of good trading:

• Never accumulate using margin. If you accumulate on margin you can end up being forced to sell right at the bottom by a margin call.
  
• Never accumulate more than you're willing to lose entirely (I never accumulate more than 10% of my portfolio in any one asset). This is a basic tenet of diversification.
  
• Understand that there is an opportunity cost for accumulation as price is falling. You are placing money in a position that is not in an uptrend and therefore is either losing money or stagnating over the near term. The most profitable traders usually wait for a breakout and accumulate on the way up after the impulse wave has begun.
  
• This strategy is only for (1) long-term investors who can hold the position for months, years, or even decades, (2) those known as #hodlers, and (3) El Salvador.
  

For those who want more details about this chart/indicator: This is an inverted chart of Bitcoin's performance relative to the S&P 500 on an adjusted scale (adjusted both logarithmically, as well as order of magnitude). I used 1/BCTUSD in the numerator and SPX*1e6 in the denominator, which arbitrarily sets a magnitude that enhances visibility. I then logarithmically adjusted the chart, inverted it, and added the 20-month EMA (white line). These types of adjustments better allow me to detect major bottoms in price action by enhancing my ability to visualize price action relative to the broader index. This relative analysis allows me to surmise, to a fairly reliable degree of certainty, when a bottom reversal may occur. The presupposition, which does not always hold true, is that a bottom reversal occurs at levels of peak underperformance relative to the broader index, regardless of that index's price action. Even if the broader index is declining, the comparative asset will decline less if the underperformance trend has indeed ended. No statistical analysis was performed to verify that this line is not overfitted to past data. This is merely my strategy and it has worked for me in the past. I use other indicators before deciding to buy.

For more thoughts on Bitcoin, you can read my prior post here: