In previous articles we have talked about the aura surrounding the term blockchain and the limitless applications for smart contracts, not to mention the cost benefits of this amazing technology.
I am a huge believer that fundamental forces that drive demand win out in the long term. Some of the most successful enterprises in the world also enjoyed a further bonus, cash flow: the more, the better. A good example of this is Warren Buffett’s company Berkshire Hathaway. Today, they have more than $100 million of spare bucks sitting in the bank.
Right now, and for the last couple of months, none of this has mattered. After the price of major cryptocurrencies have been cut in half, we have been in a directionless crypto market. After the spectacular 2017 performance, not knowing whether to buy or sell is pure mental torture. Well this could be changing, so follow along with me for just a moment longer.
Investors in cryptocurrencies and the stock market aren’t so different. So when trying to understand the why the crypto markets of late have been going nowhere, some of the same tools used on the stock market can be applied to bitcoin, Ethereum and the others.
Mental Measures Favor Bitcoin
Call it mob psychology but there are ways to use the mindset of the mob to make money. In other words, if your investment habit is to follow the crowd, you can expect to reap only average returns. If you are willing to take risk when all others are avoiding risk, your investment performance will be far different: much better or much worse but not just average.
Here is a real life situation comparing the US stock market and bitcoin. There are numerous ways to measure the mindset of stock market investors. There are two that I have relied on: the VIX and the IAI.
Bitcoin Offers Better Value Than Stocks
The Chicago Board of Exchange’s volatility index, the VIX measures the volatility of options on the S&P 500. The IAI measures Investopedia readers search for topics associated with investor anxiety.
Both of these indices have been great predictors having reached historic highs in the stock market crash of 2008. At that time the Dow Jones Industrial Average dropped to under 7000. Using the VIX, investors more than tripled their assets over the following decade.
Today both the VIX as well as the IAI are in dead neutral territory. Under these conditions, it is silly to go against the crowd. The benefits of being right are the same as the cost of being wrong. So unless you simply like to take on an impossible challenge, why bother putting more money in stocks.
Tom Lee Offers The Bitcoin Misery Index
Investor and crypto junkie Tom Lee is a guy for which I have a good deal of respect. His position on cryptocurrency pricing is typically analytically created, not just a gigantic number smothered in hyperbole. Right or wrong, his positions are well thought out. That is all you can ask of anyone.
Well Tom has come up with a contrarian mental measure for bitcoin. Appropriately it is called the Bitcoin Misery Index. In one of his frequent CNBC appearances, Lee explained how the index is calculated on a scale of 0-100.
The lower the index number the better time to be owning bitcoin. Any reading less than 27 is a buy signal, anything above 67 is time to get out. Well the Index is currently at 18.8 the lowest level in more than five years. That is almost the entire history of bitcoin.
I am not the only fan of Tom Lee and his Bitcoin Misery Index. Since his appearance on CNBC, seems like everyone is talking of writing about the exceptionally strong bitcoin buy signal. Just Google the topic and you will find it has been a top story for the past three days.
So for all the mental torture that we have been forced to go through in recent times, at least one important signal is working in our favor. And, what is good for bitcoin has good omens for other cryptos like Ethereum, Litecoin, Ripple and others. Thank you Tom Lee for adding some perspective to our misery. When everyone is miserable, it is time to be optimistic, and that time is now